Measures customer profitability

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

The appropriate measure should be profit rather than sales revenue or volume. The reason for this is that revenue and volume measures might disguise considerable variation in costs. In the case of customers this cost is the cost to serve , and we will later suggest an approach to measuring customer profitability. In the case of product protitability we must also be careful that we are identifying the appropriate service-related costs as they differ by product. One of the problems here is that conventional accounting methods do not help in the identification of these costs. 

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. 

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

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. 

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. 

As Table 3.1 highlights, there are many costs that need to be identified if customer profitability is to be accurately measured. 

The best measure of customer profitability is to ask the question What costs would I avoid and what revenues would I lose if I lost this customer This is the concept of avoidable costs and incremental revenue. Using this principle helps circumvent the problems that arise when fixed costs are allocated against individual customers. 

Kaplan, R., Narayanan, V. G. (2001). Measuring and managing customer profitability. Journal... 

It is only possible to supply parts with identical characteristics if the measurement system as well as the production processes are under statistical control. In an environment in which daily production quantities are in the range of 1,000 to 10,000 units, inaccuracies in the measurement system that go undetected can have a disastrous impact on customer satisfaction and hence profits. 

The performance criteria of a batch distillation column can be measured in terms of maximum profit, maximum product or minimum time (Mujtaba, 1999). In distillation, whether batch, continuous or extractive, purity of the main products must be specified as it is driven by the customer demand and product prices. The amount of product and the operation time can be dictated by economics (maximum profit) or one of them can be fixed and the other is obtained (minimum time with fixed amount of product or maximum distillate with fixed operation time). The calculation of each of these will require formulation and solution of optimisation problems. A brief description of these optimisation problems is presented below. Further details will be provided in Chapter 5. 

The technical quality management of an analytical laboratory can be a hard pill to swallow, but it need not be. It can help prevent excessive waste in time and money, improve productivity by eliminating duplication and waste, and most importantly lead to increased customer satisfaction and increased profits. Unless strong and sustained measures are taken, improvement in data quality caimot be achieved or maintained. No pain, no gain ... 

Likewise, the benefits of effective energy management can be measured in terms of lost production avoided, productivity improvement, continued customer satisfaction, and profitability increases. The real cost of energy is in executing the process that provides the energy supply to ran the business. 

The data obtained from service quality measures may be used in a vtuiety of ways to correct specific performance deficiencies, to identify problems for correction, and to supply data to a variety of economic models on the profit impact of causes of dissatisfaction and the revenue opportunities of sources of satisfaction. Whatever methods are used to obtain the data, service quality results must reach all of the concerned areas of the organization, and they must be evaluated and needed to balance customer satisfaction and company profits. When customer expectations are met or exceeded, they have a tendency to increase, and service-obsessed companies never see the end of programs and actions to improve service. 

---