CUSTOMER

PROFITABILITY
ANALYSIS

Presented
By :
 Flow of Presentation
 Definition Of CPA
 CRM
 Importance of CPA in CRM
 A Hypothetical Situation
 Determining Customer Profitability
 The CPA Process
 From ABC to CPA
 Conclusion
 Definition
 Analysis that assigns revenues and costs to major
customers or groups of customers rather than to
organizational units, products, or other objects.
The results may direct organizational resources
towards more profitable uses.
 It is an application of segmented reporting in
which a customer group is treated as a segment. It
is especially helpful when combined with an
activity-based costing approach that determines
which activities are performed for each group and
assigns costs based on appropriate drivers.
 Example : Activities, their drivers, and their costs
may be classified as order level, customer level,
channel level, market level, or enterprise level.
 Contd…
 In other words, Customer
profitability analysis combines
analysis of manufacturing costs
based on customer requirements with
analysis of the costs of serving
customers through different
channels.

 It takes as its starting premise, the

viewpoint that the economic value of
customers varies, and that the
variation is due to a combination of
economic forces and behaviors on the
customer side as well as within the
 CRM
 CRM (Customer Relationship
Management) is an information
industry term for
methodologies, software, and
usually Internet capabilities
that help an enterprise manage
customer relationships in an
organized way.
 Importance of CPA in CRM
 Unless you are trying to penetrate new markets or
are operating a loss-leader strategy, most of your
business transactions should be profitable.
 It would indeed be foolish to sell your products
for less than it costs you to produce and market
them. CRM, however, is not about product
profitability but rather the development of
relationships with your customers in order to meet
their needs and make a profit overall.
 The challenge of CPA is, therefore, the tracing
of both revenues and costs back to each individual
customer in order to evaluate their profitability.
A HYPOTHETICAL SITUATION
 Now, Consider two different customers of a
fictitious company. They both have purchased the
same volume for total revenues of £5,000 each.
Gross margin for the company on each
transaction is £1,000.

 However, while the first customer has made no

special product or process requests, customer 2
has required that the product be customised with
special overprinting on the packaging and
delivered just in time to three different sites. In
addition, he has asked the company to provide
special point of sale promotional materials, special
sale or return conditions and a discount.
 Contd…
 These specific requirements have
meant that the sales person
responsible for that account has had
to spend twice as much time
negotiating these terms. Taking all
these additional costs into account,
the margin the company makes on
customer 2 is only £250.
 Thus, All things being equal,
customer 1 is four times more
 Determining Customer
Profitability
Customer Revenue
 Revenue is generally the most
straightforward category to
determine. Companies usually have
information that captures
sales/revenue associated with
specific customers.
 Other information needed may
include customer discounts, rebates
and other deductions.
 Contd…
 Customer Costs

Customer costs are calculated the same way as activity

costs are calculated. Each activity that is mapped to a
customer brings along an associated activity cost. The
accumulation of those activity costs determines the
customer cost. As with resource costs, the activity cost
mapped to a customer is based upon the value of that
driver as a percentage of the total drivers

 Example :
Consider the mapping of the activity “Provide Customer
Support over the Telephone,” which has a cost of
$5,000,000 to customer A and customer B.
 Contd…
 Customer A receives 1500 minutes of
support, while customer B receives 3500
minutes of support during the same period.

 In this example, 30% (1500/5000) of the

$5,000,000 will go to customer A, and 70%
(3500/5000) of the $5,000,000 will go to
customer B. This means that you spent
$1,500,000 in this period to provide
customer support over the telephone to
customer A.
 The CPA process
Start with the following data:
Revenues per customer
(including discounts or
rebates, sales commissions, or
credit notes);
Total business unit costs,
especially overheads.
 The CPA process then takes
four steps.
 CONTD…
Step 1
 For each customer subtract their direct costs (cost of goods
or cost of sales) in order to identify their contribution
margin.

 Step 2
 Next, understand what you do to meet your customers’
needs i.e. map the various activities that go into serving
them. The best way to do this is to develop a simple process
flow diagram representing customer interactions and
identifying where the cost elements lie. At this stage it
might be useful for you to map your customers’ activity
cycle and develop some form of graphical checklist .
Additionally, the sequence of customer interactions might
vary depending on the nature of your business.
 CONTD…
 At this stage, using estimates is acceptable. Much
of the analysis becomes easier once you have
gained a clear understanding of your basic
customer interaction processes and how many
customers you have.

Step 3
 For each cost group (sales force, call centre, etc.)
identify what activities drive costs. Begin by
allocating those costs that are simple to categorize
and that you can easily relate to specific activities.
Use your judgment to allocate those costs that are
not as easily traced.
 CONTD…
 Step 4
 Finally,
just subtract the overhead
costs that you have just computed in
step 3 from the contribution margin
of step 1.
 From ABC to CPA

 CPA relates to activity-based

costing by linking operational
activities (and their costs) with
individual customers. Starting
with ABC will therefore, provide
you with key insights into a
customer’s profitability while
going some way in explaining
why different customers have
 CONTD…
 Conventional Costing
Simplistic allocation of costs

 Costs --Consumed by-- Products

 Allocation:
 Costs are allocated to products based on assumed
linkages or convenient alternatives such as direct
labour hours

 Activity-Based Costing
 Traces costs based on cause and effect

 Costs-- Consumed by Activities—Consumed by

products
 CONTD…
Resource Cost Drivers:
Costs are assigned in activities
based on usage patterns

Activity Cost Drivers:

Activity Costs are assigned to
products based on usage patterns
 Conclusion
 Customer cost and customer
profitability is critical for a company
today. Knowing your total costs for
particular processes and activities allows
you to focus on reducing and controlling
them. Knowing costs for a specific
customer allows you to reduce, chang or
charge for activities/services provided to
them.

 The determination of customer costs and

 profitability should be performed using
activity
 based costing techniques. Although it
 CONTD…
 Although many companies do
not have customer cost and
profitability systems, a
growing number are
beginning to develop them
and it is imperative that you
develop the information
before your competitors do.
THANK YOU