Customer Profitability as a Basis for Portfolio Planning
Customer profitability is a key dimension to assist in the achievement of corporate strategic objectives. The allocation of costs and revenues to individual customers, in order to arrive at the contribution of each to profits, should, therefore, be part of the customer portfolio of any supplier. Campbell and Cunningham, in their customer analysis, included customer profitability in their lifecycle classification of customer relationships, but they also highlighted the difficulties involved in acquiring such information. Fiocca, on the other hand, did not use customer profitability as an element in his customer analysis. In fact he used his second matrix (customer business attractiveness vs. relative buyer/seller relationship) simply to infer that different cells of the portfolio matrix could be associated with different levels of profitability. The process of customer costing involves taking the logic of product costing and applying it to customers. The areas where cost variations can be significant are:
l Product mix: Customers have different product profiles. The product mix bought by any customer can be critical to profitability. If, for example, the product mix is mainly confined to low profit lines, this could mean a profit below what is potentially possible or even a loss after all costs are taken into account.
l Selling costs: Despite the fact that accurate information is difficult to obtain, the salesperson’s call pattern is bound to vary because of custom, practice, customer preference and complexity of operations. Time and expense of calls will vary not only with frequency but also with distance and duration. If one customer is taking half of a salesperson’s time or requires the sales manager’s personal attention on every occasion, then these direct costs should be reflected in the calculation of that customer’s profitability.
l Special trade terms: Powerful customers are usually able to obtain prices either by laid down quantity discounts or by specially negotiated terms. In addition, there may be cash discounts and also special offers in order to persuade customers to take certain product lines.
l Administration costs: The costs of administering customers will vary in the same way as selling costs, as some customers are more awkward than others.
Another key factor in this category is the cost of handling orders, as their size and
frequency will again vary.
l Working capital: Sometimes specific requirements are laid down by customers, i.e. certain levels of stock must be held centrally for collection on demand and this will have an effect on costs. Another important factor is the cost of giving credit – the longer the average period of credit given to a particular customer, the higher the financing costs will be. This clearly erodes profitability.
l Indirect costs: It is arguable whether this final stage of apportionment is necessary. For most practical purposes the gross contribution level is of primary importance. However, an estimate of the net profit per customer is desirable. Two such costs which should be included under this heading are media-based product advertising and marketing research. It is very difficult to allocate these costs as no one element of each can be directly applied to any given customer or group of customers
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