Customer profitability analysis

Articles

Companies are looking for ways to manage customers so that each customer is satisfied and also is profitable.

Customer profitability analysis is based on the assumption that a satisfied customer is not necessarily a profitable one. The costs of customer retention, customer loyalty and customer service are costs to be analyzed to determine the customer profitability. Activity-based costing technique can be used to help.

The enterprise must maintain and increase customer profitability and also turn unprofitable customers to profitable ones.

  • Analyse the cost of servicing the customer.
  • Better prioritize customer service to attract and retain high-value customers.
  • Develop a long-term relationship with the customer to increase the revenues and profits.
  • Measure the lifetime value of the customer.
  • Optimize marketing spend.

A comparison of Do’s and Don’ts for enterprises:

Do’s Don’ts
Analyze customer’s bottom-line contribution Consider all customers equally
Internal product groups operate to achieve a profitable relationship with each customer Internal product groups work in separate silos, often with competing objectives
Targeting high-performing customers or dedicating teams to mediate unprofitable customers No understanding on how individual customers impact the bottom line of the enterprise
A commission model based on bottom line for each customer can lead to better collaboration between sales and operations Traditional commission models based only on revenue gives no incentive to sell profitable deals
Retention program that ensure that discounts, billing adjustments are aligned with the customer’s contribution to the bottom line. Retention program that focus on every customer at all costs

The following is an example of report that can help to differentiate profitable and unprofitable customers:

Customer name Sales Product cost Service cost Profit Profit on sales %
Compagny X 100 000 60 000 40 000 0 0
Compagny Y 80 000 60 000 15 000 5 000 6.25%
Compagny Z 75 000 60 000 5 000 10 000 13.33%

If you measure customer profitability by revenue alone Company X is the winner. But unfortunately, the enterprise does not make any money with that customer. But if you consider profit then Company Z is the most profitable even if the sale is the lowest.

Oracle Profitability Manager can help to do customer profitability analysis. Integrated with Oracle E-Business Suite, the product has the following features:

  • A powerful allocation engine that supports many allocation methodologies.
  • Can use the Activity-Based costing method
  • Utilization of the Oracle Workflow system to facilitate a rule approval process that controls access to production data.
  • A predefined Discoverer business area and workbooks that facilitate data analysis.
  • Integration with Oracle General Ledger data or external data sources.

Another product that Oracle offers is Oracle Hyperion Profitability and Cost Management software is a performance management application that is part of Oracle's enterprise performance management (EPM) system. Oracle Hyperion Profitability and Cost Management is the only packaged profitability application that leverages Oracle Essbase Plus, the industry's leading OLAP (Online Analytical Processing).

Oracle® & Oracle® E-Business Suite
are registered trademarks of Oracle Corporation