Customer-profitability analysis is the reporting and assessment of revenues earned from customers and the costs incurred to earn those revenues (Datar and Rajan, 2014). A customer-profitability profile is a tool used to rank customers based on customer-level operating income (Datar and Rajan, 2014). This can present the most profitable customers and their contributions, which can serve as a source for determining high priority customers which deserve the highest service and priority. Some of the resources that managers must consider when evaluating resources to allocate to customers would include (Datar and Rajan, 2014):
- The likelihood of customer retention
- The potential for sales growth
- The long-run customer profitability
- The increase in overall demand from having well-known customers
- The ability to learn from customers
There are also other considerations to keep in mind, such as methods for navigating unprofitable customers. While the customer-profitability profile can provide more resources than just highlighting unprofitable customers, this is also an important piece of information to pull from these analytics because it assists in making strategic decisions which support the financial health of the organization. Managers must be careful to do strong cost-analysis reports before cutting ties with any customers because the long-term impacts must align with the financial benefits of the organization. Unfortunately, there are cases where it is in the best interest for an organization to sever a customer relationship. For that reason, I do not believe that all customers are important for the organization’s financial health. If a customer is chronically unprofitable or holds limited future prospects, then this may be a case to sever the customer relationship (Datar and Rajan, 2014). Additionally, if they fall outside of the company’s target market or require unsustainably high levels of service relative to the company’s strategies and capabilities, this is also cause for severing the relationship (Datar and Rajan, 2014).
There are however other options that can be considered in lue of dropping a customer. This could include increasing costs or allocating costs in a manner that provides a more profitable outcome. This would require deeper cost-analysis to determine the best avenue for obtaining higher profit margins and generating more revenue. A great example of an organization that took this route is AT&T. The organization saw its iPhone customers were becoming unprofitable due to their unlimited data plan that was being offered. As a result, AT&T began pricing data in order to make those customers become profitable for the organization. While this caused some discontent for the customers, it did lead the company to be more profitable and they had projected growth in the future as well with this plan. Through this example, it is apparent that there are measures that can be taken to retain customer relationships while also pulling out from unprofitable positions with the organization’s customers.
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In the video Businesses Getting Results, the speaker told us that we need to focus on the value how we can provide to us customers rather than unprofitable. We should analysis the situation we met then choosing price strategy such as price skimming model, penetration pricing or status quo pricing(Businesses Getting Results). A customer profitability profile highlights differences in the current period’s profitability across customers. Dropping customers should be the last resort. An unprofitable customer in one period may be highly profitable in subsequent future periods. And yes, regardless of what industry you’re in or what kinds of products and services you sell, your customer is the most important part of your business. Without the customer, you don’t see any sales(Ahmed, 2020). Customer-cost hierarchy categorizes costs related to customers into different cost pools on the basis of different types of cost drivers(Datar&Rajan, 2014). Merchants can keep unprofitable product lines to prevent the loss of consumers. Brand loyalty is a reason companies keep unprofitable product lines. A similar situation to maturing in the product life cycle occurs when a company introduces new variations on a product. They may keep the old product around as part of a brand loyalty strategy to retain old customers while trying to get them to try new product variations(Petersen).
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No. “A customer profitability profile is the reporting and assessment of revenues earned from customers and the costs incurred to earn those revenues” (Datar & Rajan, 2014). An unprofitable customer can be a profitable customer. Take Christmas for example, a person who is not normally a big shopper will more likely become a profitable one. One believes that organizations rank their customers based on their takings(spending). In the article titled “Customer profitability” AccountingTools (2018) stated the following:
This analysis can be made more accurate by using activity-based costing to assign ordering, customer service, and distribution costs to individual customers. By doing so, a business can differentiate between its high-profit and low-profit customers. With this information, a firm can enhance its profitability by dropping unprofitable customers and concentrating its sales efforts on its most profitable customers.
Management use customer profitability to improve customer satisfaction. The reason one suggestion is no. is because when customers are dropped cost assigned to those customers do not go away in the short run. The customer profile allows companies to monitor loyal customers by happy them happy in different way such as higher credit limits on credit cards, free upgraded rooms at hotels, or early check ins for flights.
Organizations need to understand that all customers are important and contribute to the success of the business no matter if they are frequent customers or not. One believes that for many companies the best customers were the smallest contributors to the operating income of the business. Just because a customer isn’t a high-profile customer, they can still be loyal by prompting the company’s image, products and convince others to shop at that business.
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