Harness Customer Profitability Analysis to Boost Profits
Posted by David Haertzen
Customer Profitability Analysis is an analytic approach that determines the profitability of individual customers or segments of customers by identifying revenue and cost patterns associated with those customers. This includes identifying the most profitable customers (angels) as well as unprofitable customers (devils).”The most profitable 20% of customers generate between 150 – 300% of total profits.
The middle 70% of customers about break even, and the least profitable customers lose 50 – 200% of total profits, leavings the company with its 100% of total profits. Often some of the largest customers turnout to be the most unprofitable.” According to Dr Robert Kaplan of Harvard Business School in “Customer Profitability and Management”.
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Lifetime Customer Value (CLV) is the expected present value of a customer and is computed by summing the future value of predicted revenues and by subtracting the predicted future value of costs such as: acquisition cost, cost of goods sold and Cost to Serve (CTS). The top 20% of customers based on CLV are your best customers and the bottom 20% of customers are your worst customers. The percentages different depending on the distribution of best and worst customers.
But you may ask, how can we predict revenues and costs? This is where Business Modeling,Customer Modeling, Time-Driven Activity-Based Costing (TDABC) and Predictive Analytics are used. Each of these concepts will be described in this and following articles.
The complete article can be found at Infogoal.com.