Customer profitability

Prices. The price of commodity chemicals is based on cost of production, capital needs for expansion, and the ratio of supply to demand. Profit margins can drop under changing conditions, and unit price tends to be low. Specialty chemical prices vary widely. They are based on the value of a product or system to the customer. Profit margins can usuaHy be maintained, and unit price is higher than for commodity chemicals. 

Example 1 - Customer loyalty and customer profitability. Investments made in customer loyalty initiatives are largely justified by an assumed positive influence on profitability. The empirical results of Reinartz and Kumar (2002), however, challenge the assumption that higher loyalty is associated with increased profits. They examine the... 

Example 2 - Resource inputs and customer profitability. Firms invest resources in a customer relationship with the objective of earning a return on that investment. Consistent with this goal, Shapiro, Rangan, Moriarty, and Ross (1987) develop the price versus cost-to-serve (which includes pre-sale, order-related, distribution, and postsale service costs) framework, which links vendor investments to the returns from each customer relationship. This relationship, however, is not a simple one efforts to find a strong correlation between vendor investments in a relationship (as measured by cost-to-serve) and returns (i.e. price paid by the customer) typically fail. Shapiro, Rangan, Moriarty, and Ross (1987) interpret this as evidence that high income does not necessarily mean high cost-to-serve. And nor does low income necessarily mean low cost-to-serve. 

Our example uses the data from Bowman and Narayandas (2004). The customer firms are more than 300 industrial customers of firms that provide metal processing, fabrication, and distribution services. The customer firms are in industries that include manufacturing, construction, transportation, aerospace, and electrical. As a group, these customers use over sixty different vendors. A sponsoring vendor firm provided financial data and details of its efforts at the customer account level, enabling us to link vendor resource commitments to vendor performance and customer profitability. 

To utilize the framework with our data, we first classified each customer s price (high versus low) and cost-to-serve (high versus low) using median splits. We compared the means across the resulting four groups on customer profitability, size, share of wallet, satisfaction with vendor performance, satisfaction with competitor performance, and propensity to share costs. The results are provided in Table 11.4. 

In summary, these descriptive results support our basic thesis that the impact of satisfaction and customer loyalty on customer profitability is moderated by situation-specific factors encountered by the vendor. 

In Bowman and Narayandas (2004), we present a chain-link model of customer profitability using these data. The results from this study may... 

In this chapter, we have discussed how to link returns to customer management effort reflected in customer profitability, specifically in... 

Linking customer management effort to customer profitability in business markets. Journal of Marketing Research, 41(4) 433-447. 

Libai, B., Narayandas, D., Sc Humby, C. 2002. Toward an individual customer profitability modci. Journal of Service Research, 5(1) 69-76. 

Mulhern, F. J. 1999. Customer profitability analysis measurement, concentration, and research directions. Journal of Interactive Marketing, 13(1) 25-40. 

Niraj, R., Gupta, M., Narasimhan, C. 2001. Customer profitability in a supply chain. Journal of Marketing, 65(3) 1-16. 

An explicit understanding of historical and expected customer profitability by product and by transaction, with a forward-looking view on raw material costs. 

Each element of the go-to-market value delivery system is likely to require the development of new tools and techniques that enable enhanced transparency and faster and improved fact-based decision making. This starts with enhancing the transparency of customer profitability, to gain an understanding that goes deeper than annual overall profitability by customer and provides transparency by customer, by product, and by transaction. Averages quite often disguise improvement opportunities - 50 percent of transactions are below the annual customer profitability. 

In addition to customer profitability tools at the transaction level, additional tools will need to be implemented and delivered to the accountable individuals in areas such as customer segmentation, target margin setting, contract terms policies, raw material cost movement expectations, and customer/product mix optimization. 

Understanding customer profitability (pocket margin) and pricing opportunities... 

New customer interfaces lead to improved communications and better predictions of customer demand, which leads to improved service for customers. Customer service teams work with customers to identify further and eliminate sources of demand variability. Performance evaluations are undertaken to analyze the levels of service provided to customers as well as customer profitability. 

An important change that we made early in the supply chain process was the implementation of customer profitability and measuring price and trade promotion. We started the program in 1992, and it has been the most important change to drive improvement that we have made in our supply chain processes. 

AT ESP, WE FOCUS ON CREATING NEWER AND BETTER SPILL-CONTROL SOLUTIONS that increase our customers profitability in today s tough markets. That means we make sorbents that perform better, find earth-friendly alternatives for others and keep them all competitively priced. 

First order fit between the activity and strategic theme. In the activity map, activity costing fits the notion of measuring contribution on different pieces of the business. Its application is as an internal control to evaluate product and customer profitability. Product R D is another example of first-order fit. The Product R D activity supports the Technical Leadership theme. 

Measuring customer profitability Profitability by customer measured Reports are produced quarterly Full activity-based profitability measured Annual business reviews with the customer... 

Deploying customer profitability Customer profitability shared internally Profitability shared with the customer Information used in negotiations to facilitate new ways of working together... 

Companies can define themselves by the type of customer they seek to service. For this purpose, the customer profitability matrix provides four categories. It requires detailed cost analysis and allocation of indirect costs for all customer segments. This encompasses pre-sale costs (location, need for customisation, etc), production costs, distribution costs, and after-sale service costs. The actual prices charged to different customer segments are subsequently assessed, together with the volume consumed over time and its value. The matrix (Figure 2.4) has net price on the vertical axis, and cost on the horizontal, and is divided into four quadrants ... 

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