Are All of Your Customers Profitable to You?

The only value a company will ever create for its shareholders and owners is the value that comes from its customers – its current ones and new ones acquired in the future. Customers are source of wealth creation for shareholders and owners. To remain competitive, companies must determine how to keep customers longer, grow them into bigger customers, make them more profitable, serve them more efficiently, and acquire more profitable customers.

But there’s a problem with pursing these ideals. Customers increasingly view suppliers’ products and standard service-lines as commodities. This means that suppliers must shift their actions toward differentiating their services, offers, price discounts, and deals to different segments of existing customers to retain and grow them. Further, they should concentrate their marketing and sales efforts on acquiring new customers who have traits comparable to those of their relatively more profitable customers.

A Need for Customer Profitability Reporting

Managers are increasingly seeking more granular data about the costs related to delivering products to and serving a customer, as well as information about intangibles such as customer loyalty and social media messaging of the company and its competitors. This information is essential to retain and grow existing customers and to win-back and acquire the types of new customers that will be relatively more profitable. 

Companies are realizing that it is no longer their objective to just increase their market share and grow sales but rather to grow profitable sales and maximize the return on investment (ROI) from their marketing and selling efforts.

Why should this be relevant to companies? It is because unfortunately many companies’ accounting systems are unable to properly calculate and report customer profitability information to support their analysis. Many companies are not properly linking and tracing their customers to the expenses below the product or standard service-line gross profit margin line in their income statement. These would include expenses for distribution channels, selling, marketing, and customer-related activities (e.g., invoicing) and services. What is needed is to report a profit or loss income statement for each customer.

As a result of the shift from product- to customer-centricity, companies are now viewing customers more as an investment similar to a stock portfolio than as an expense. By using profit margin-management techniques, a company can properly measure customer profitability and, in turn, achieve profit lift from all of its customers.

Devil and Angel Customers

There are high maintenance and low maintenance types of customers. The former is always shifting schedules, requiring special and standard orders, calling help desk, and returning goods. They are devils. In contrast, angel customers do none of these.

Some companies believe that reporting customer product or standard service-line sales volume is all that is needed. They are being short-sighted. Some customers purchase a mix of mainly low-profit margin products. After adding the “costs-to-serve” for those customers apart from the products and service lines they purchase, these customers may be unprofitable to a company. Other customers, those high maintenance devils, who purchase a mix of relatively high-profit margin products may demand so much in extra services that they also could potentially be unprofitable.

And for those companies who are successfully calculating and reporting profit levels by individual customers, they can further benefit by using analytics to investigate what are the key factors that differentiate the relatively more and less profitable customers other than just their sales volume.

How does one properly measure customer profitability? How does one project the incremental financial impact of customer profit lift from cross-selling, up-selling, and unbundling services with special fees? Why should the marketing and finance function work more closely to better target which types of customers to retain, grow, win-back, and acquire to maximize profits and wealth creation to investors?

One can the learn the answer these and more questions and learn how analytics support customer profit management by listening to my Michael Management course on measuring and managing customer profitability.