Customer profitability analysis is a cost management approach that identifies the costs and benefits of service to certain consumers or types of consumers to increase overall company profit . Analysis of the comparison between the costs of providing services to a particular customer or a group of consumers with the benefits that can be obtained in order to increase the overall profitability of the organization.
Analysis of customer profitability can be used to determine how the allocation of company resources to each consumer so that the company can know whether the allocation can be effective by looking at the amount of profit generated from each customer.
Benefits of Customer Profitability Analysis
The advantage of using customer profitability analysis according to Blocher (2002: 831), namely:
- Make the company focus more resources both in areas that produce growth rates that are profitable for the company and rationalize areas that produce unsatisfactory returns.
- Identify unpredictable differences in profitability among consumer groups and investigate the causes of these differences
- In the case of aggressive negotiations with corporate consumers, it can quantify the financial impact of proposed changes so that they can be the basis for decision making
- Adjust product pricing policies for consumers who demand more services than the gross profit they produce
- Changing the way they interact with consumers creates activities that burden companies.
- Determine the potential market segments in providing the largest consumer value while contributing to a large profit for the company
How to Conduct a Customer Profitability Analysis
Stages – stages in conducting Customer profitability analysis according to Mowen, namely:
- Identifying customers
In identifying consumers basically consumers can be grouped based on taste, age, social level, how to distribute consumer needs, references, income, etc.
- Calculating customer revenue and customer cost
Customer revenue is the income earned by a company in conducting its business. And this is determined by factors of the number of consumer purchases of products, giving discounts to consumers, and sales return and allowance. Customer cost is the cost charged to consumers when consumers consume products or activities.