Measuring and Managing Customer Profitability

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

Customers increasingly view suppliers’ products and standard service lines as commodities. This means that suppliers must shift their actions toward differentiating their services, offers, discounts, and deals to different types 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.

As a result of this shift from being product-centric to customer centric there needs to be an increased emphasis on measuring current and future potential profitability of products, standard service-lines, channels, and customers. (For business to consumer (B2C) industries, there is need to also consider applying of “customer lifetime value (CLV)” metrics.)

A mind-shift is needed from pursuing increased sales volume at any cost … to profitable sales volume. Cost accounting leveraging business analytics is essential to achieve this result. Organizations realize it is substantially more expensive to acquire new customers than to retain existing ones. This focus on customer retention combined with the recognition that spray-and-pray mass marketing of products and service-lines is being eclipsed by direct one-to-one to marketing with customers and prospects is causing the need for the marketing function to require financial data on customer profits and future value. Why? Because given any company’s scarce resources, it should attract its relatively more profitable customers rather than high maintenance ones whose substantial cost-to-serve erodes profit margins.

Which types of customers are worth more to retain, grow, acquire, or win-back? And types are not worth pursuing? And how much should you optimally spend on each type of customer micro-segment?

The Internet is irreversibly shifting power from sellers to buyers. Suppliers must react. Earning, not just buying, customer loyalty is now mandatory. A popular term in CRM circles is customer lifetime value (CLV) – measuring each customer as if they are an investment with an ROI. Is this another fad or a real need? Topics include:

The six eras of management accounting including the shift from product and service-lines to a customer-centric one.
The continuum of direct costing from project accounting to standard costing to activity-based costing (ABC).
Basic concepts about activity-based costing (ABC).
Why “cost-to-serve” expenses (e.g., distribution, marketing, selling, customer service) expenses are more important than product and service-line expenses.
How to quickly design and implement a customer profitability measurement system in weeks, not months, using rapid prototyping.
Actions taken with the information to make customers more profitable.

Session Objectives:

Why customers are the source of shareholder wealth creation.
Why as differentiation from product advantages is reduced or neutralized due to commoditization, then service level differentiation matters and the customer relationship grows in importance as a competitive advantage.
How to shift the mindset from growing sales to growing profitable sales and to view customers as investments like in a stock portfolio to seek higher ROIs – return on customers (ROC).
Why the marketing and sales functions need accounting data to better formulate customer account strategies including compensation incentives.
How to measure and manage product, channel, and customer profitability.
(This objective is optional to add to the presentation.) How measuring forward-looking customer lifetime value (CLV) differs from calculating historical customer / consumer profitability for B2C industries.

Primary Instructor - Gary Cokins, CPIM: Gary is an internationally recognized expert, speaker and author in advanced cost management and performance improvement systems. Gary began his management consulting career first with Deloitte and then with KPMG. Subsequently, he headed the National Cost Management Consulting Services for Electronic Data Systems (EDS) and worked for SAS, a leading provider of enterprise performance management and business analytics and intelligence software. Gary received a BS degree with honors in Industrial Engineering/Operations Research from Cornell University and his MBA from Northwestern University’s Kellogg School of Management.