Every customer relationship should be profitable over time, no matter how big or small. What is amazing to me is how few companies actually measure the. Keywords: Customer Profitability Analysis (CPA); Customer Life Time Value The customer profitability and a business relationship between companies and. Religence Next-Generation Thought Leadership Paper Series 5. Profitability Segmentation Focus on High-Profit Growth Potential. Not all customers are created.
Are they antagonistic towards your company? Such categories are helpful.
With this greater depth, we feel more comfortable in using satisfaction as a method for profitability segmentation. But we prefer to combine Voice of the Customer research with the more sophisticated financial approaches described in methods four through seven.
In his view, you would measure your success by how many customers like these you grow. Recency, Frequency, Monetary RFM Transactional Analysis RFM transactional analysis—of those who bought most recently, most frequently, and who make the largest purchases—has been considered a best practice to measure the share-of-wallet and predict future profits. Their findings were surprising given that millions have been spent using RFM to measure loyalty marketing. Obviously, best practices evolve.
Customer Lifetime Value CLV Martha Rogers of Peppers and Rogers and 1-to-1 Marketing fame, now part of the Carlson Marketing Group, went beyond using just CLV to predict future success and suggested that a key performance indicator for sales and marketing should be whether there is an increase in CLV expected for the business, one period over another.
To bypass the difficulties most have had in measuring CLV based on profit, she and Don Peppers now suggest a metric they call Return on Customer, which is based on cash flow in measuring Customer Equity, defined as the Net Present Value NPV of all cash flows expected over a customer lifetime.
NPV calculations consider the risk and the cost of money in the future.
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The Religence Framework for Customer Relationship Intelligence also uses an estimated CLV calculation, but one based on profit in its strategy decision models.
Yet with the Religence Framework, you can move to an operational level beyond estimated CLV, because what actually happens is tracked, and the operational data on profit is fed back to the strategy decision models for continuous improvement. You can evaluate effectiveness with what happens.
Not only does it calibrate CLV, which is sometimes discounted, but it helps discern which actions to take in the situation. Trades off short-term and long-term.
Religence - Value customer relationships. Drive Profit
Because the Religence Framework for Customer Relationship Intelligence measures variable costs of interactions with customers, a more complete picture of profit can be achieved than what is done in either traditional accounting or even in an Activity-Based Costing accounting approach. Anticipating, and then calibrating, CLV based on profit is difficult without a cohesive framework for the entire customer lifecycle like the Religence Framework.
The math here is that generally 20 percent of customers account for 80 percent of revenue and often more than percent of profit. In financial services, the numbers are more dramatic. There, 20 percent of customers typically account for as much as percent of profit.
The huge discrepancy in financial services is caused by the incredible number of unprofitable customers these companies typically carry on their books. This profit matrix analysis approaches profitability segmentation by correlating the most profitable customers with the most profitable products, in terms of total contribution to profit. Considering the total contribution to profit puts the focus where it should be. Bob prefers to use a four-by-four matrix instead of the more commonly used three-by-three matrix of profitable, marginally profitable, and not profitable.
There are usually only a small percentage of franchise customers. Segmenting customers this way greatly expands the options in setting business rules on how to serve them and in developing strategies for high-profit revenue potential. Please see Align for Profit: Profit Matrix for an example of how to use the matrix. If you pay special attention to those customers who generate the most profit, they are more likely to generate even more. These unprofitable customers actually detract from overall firm profitability.
The firm would be better off if they had never acquired these customers in the first place. Construction[ edit ] Customer profitability is the difference between the revenues earned from and the costs associated with the customer relationship during a specified period. In theory, this is a trouble-free calculation. Find out the cost to serve each customer and the revenues associated with each customer for a given period.
While it is usually clear what revenue each customer generated, it is often not clear at all what costs the firm incurred serving each customer. Activity Based Costing can sometimes be used to help determine the costs associated with each customer or customer group. For components of cost not directly related to serving customers, the calculation of customer profit must use some method to fully allocate these costs to customers if the total of customer profit is to match the operating profit of the firm.
If the firm decides not to allocate these non-customer costs to customers, then the sum of customer profit will be greater than the operating profit of the firm. Cautions[ edit ] Like other profit measures, customer profitability is historical.