Succeed by Analysing Customer Profitability

Succeed by Analysing Customer Profitability

Beijing, China (prHWY.com) April 23, 2012 - Applying suitable measures accurately reveals sales by customers or customer groups. Costs are harder to allocate with total accuracy: but intelligent approximation will highlight those customers who, prima facie, are making a loss. Do you drop them, grin and bear it, or seek to move the account into profit? Termination is sometimes the right option, though one which managements hesitate to take - though one plastics moulding firm, Nypro, did precisely that. It reduced its customers from hundreds to 30, each contributing at least $1 million to annual sales. Turnover trebled after the cutback, and profits soared. The terminations enabled Nypro to concentrate on providing the remaining customers with superlative service.

The issue isn't only current profitability. Dropping customers can be counter-productive if they contribute anything at all to overheads, or if dropped purchasers go on to make money for a rival. Identifying future customer profitability is an underused approach of great potential. It doesn't have to be underused. Many techniques for charting the gap, and then closing it, are available for managements that have the necessary will.

Changing the balance of costs and revenues is another winning strategy: leading companies focus on optimising the return from their most profitable customers, while gaining bigger bangs per buck from the unprofitable. Savings on sales and service are the key: low-cost sales channels and call centres are powerful, IT-enabled tools for bettering the economics of the business.

Although analysing customer profitability offers further rich pay-offs, it doesn't go far enough. Sharper customer focus means abandoning the mass-market mind-set and segmenting customers according to how they actually behave. The whole business can be restructured round the identified segments. In one case, instructively, segmentation studies had to be undertaken by the retail department because the IT function 'was focused on financial and operational issues' and was 'unresponsive' to marketing needs.

The benefits of identifying meaningful segments, and thus increasing marketing and sales effectiveness, are so great that few sizeable businesses, or their IT people, dare ignore segmentation. Rather, it should be a key dimension of strategies and planning. Modelling customer behaviour, using a variety of techniques, will define segments, microsegments and individual targets hammer crusher. Moreover, the barrier imposed by the cost of segmentation is lessening as IT advances make it cheaper to acquire data and to exploit the identified segments.

Tailoring the business and its processes to suit the customers has always been the foundation of great commercial success. Most companies lost sight of this principle as their customer bases swelled ball mill. Thanks to IP technology, they can now return to fundamentals. Even though the mode must still be mass-marketing, today's customers in the mass increasingly expect more individual treatment, while suppliers themselves, eager for differentiation, seek to treat mass customers individually.

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