Should I do a Customer Profitability Analysis?

The ease with which you do this analysis and the accuracy depends entirely upon the level of granularity of your accounting system and ancillary reporting systems.

The obvious idea is to figure out how much each customer provides in profit. You need to know what customers buy, how much they buy, how often, and the gross margins from each of those products. However, to do a realistic job of analysis, you have to take into consideration the returns, defects, post sale customer service, and the cost of maintaining the customer. Some would also suggest that the cost of acquiring the customer should be factored in… to get a total profitability from each customer. Few organizations have enough data to provide all this information in an easily accessed format.

Figuring all this out depends upon whether you can get the requisite information, or whether you have to make “assumptions.” The biggest and most distorting assumptions will be in the product mix and the after-sale support. If you are considering the total profitability, you also have to figure out how much it cost to acquire the customer… a process fraught with assumptions.

So, you end up doing all this analysis, and what do you have? You probably have some customers that are PIA — perennial incessant annoyances… which you would like to drop. STOP. Wait, you’re not done. That’s because in most environments, one customer may be related to other customers. That PIA customer may be responsible for sending other A-list customers your way. So before you decide to jettison a PIA customer, think hard and analyze carefully… sometimes those relationships are sub-rosa and not shown in the figures. Also, before figuring that a customer is a PIA, remember that they may be serving a useful function: the proverbial cannery in the coal mine…. they may be your best early warning system of product or process problems. Sure they are PIA’s , but they keep the entire organization on its toes.

Wow, a lot to consider: and it’s not cut and dried. Be careful in cutting what appears to be low or no profit customers.

June 3, 2017

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