How do you measure customer profitability?

    A vexed question, and managing customer profitability is as fundamental as managing the P&L, but possibly more complicated.

    It is usually unrealistic to measure the profitability of all customers, but most businesses live by the 80/20 rule, so concentrate on the 20, and apply the knowledge gained to the remaining 80, with appropriate caution.  Several parameters should be measured, the more the better, in order of importance:

  1. The basic measure is gross Margin. You know (or should know) the marginal cost of production and delivery of the products they buy , this is the basic measure, and should be done religiously.
  2. Costs to service the customer need to be considered. Some customers are easy, undemanding, and cause little disruption. Others you may wish to pass to your competitors. This ends up being a combination of data, such as product returns, debtors days, inventory you need to hold, and perhaps others, as well as the harder to measure things like how much time and trouble the sales force, technical support, and other functions need to spend to service the customers needs. Cost to serve is usually obscured from view, and hard to measure, but it is a huge factor in most businesses.
  3. Customer  life time value, measures the value of the customer to you over a period of time. This analysis can be done in conjunction  with a discounted cash flow analysis, as a means to better understand the returns that may come from investments in managing the customer.

    Measuring customer profitability is a key part of a program of pro-actively managing the investment most businesses make in servicing their customers, but is too often allowed to drift.

    A complication is that customers that have the potential to be amongst your top customers have to start somewhere, so the manner in which you measure profitability must be sufficiently flexible and responsive to recognise those that are currently not amongst your top customers, but are nevertheless “key” customers in your planning processes, and for your future.


About strategyaudit

StrategyAudit is a boutique strategy and marketing consultancy concentrating on the challenges of the medium sized manufacturing businesses that make up the backbone of our economy. The particular focus is on their strategic and marketing development. as well as the business and operational efficiency improvements necessary for day to day commercial survival. We not only give advice, we go down "into the weeds" to ensure and enable implementation.
This entry was posted in Management, Sales, Strategy and tagged , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s