Customer Profitability
A profitable customer is a person, household, or company that over time yields a revenue stream exceeding by an acceptable amount the company’s cost stream for attracting, selling, and serving that customer.
Note the emphasis is on the lifetime stream of revenue and cost, not the profit from a particular transaction. Marketers can assess customer profitability individually, by market segment, or by channel. Many companies measure customer satisfaction, but few measure individual customer profitability.
A useful type of profitability analysis is shown in Figure 4.2
Customers are arrayed along the columns and products along the rows. Each cell contains a symbol representing the profitability, positive or negative, of selling that product to that customer.
Customer 1 is very profitable; he buys two profit-making products.
Customer 2 yields mixed profitability; she buys one profitable product and one unprofitable product.
Customer 3 is a losing customer because he buys one profitable product and two unprofitable products.
What can the company do about customers 2 and 3?
It can raise the price of its less profitable products or eliminate them, or
it can try to sell customers 2 and 3 its profit-making products. In fact, the company should encourage them to switch to competitors.
Customer profitability analysis is best conducted with the tools of an accounting technique called activity-based costing (ABC). The company estimates all revenue coming from the customer, less all costs (including the direct and indirect costs of serving each customer). Companies that fail to measure their costs correctly are also not measuring their profit correctly and are likely to misallocate their marketing effort.
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