After studying this chapter you will be able to understand: Are all customers profitable? What is customer profitability? Steps to calculating customer profitability, measures of customer profitability, what do you do with unprofitable customers? | TOPIC FOCUS ON CUSTOMER PROFITABILITY ARE ALL CUSTOMERS PROFITABLE? Sparrow Designs places a lot of rush orders What’s the potential impact of these rush orders on Bradley’s operations? Is there an extra cost to servicing these rush orders? Is there a cost to the sales rep’s time? By the way, Sparrow Designs orders $2 million a year RESEARCH SAYS The top 20% of a company’s customers generate 120% of the company’s profits The bottom 20% loses as much as 100% of the company’s profits. So what would happen if the company dropped those bottom 20% customers? WHAT IS CUSTOMER PROFITABILITY? It is not just the gross profit generated by the customer You need to consider all the costs of servicing the customer This means all the selling and administrative costs must be included in the profit analysis Think ABC STEPS TO CALCULATING CUSTOMER PROFITABILITY Identify all selling activities Develop selling activity cost pools Calculate selling activity cost pool rates Allocate selling costs to customers Calculate customer profit margin to include selling costs as well as cost of goods sold MEASURES OF CUSTOMER PROFITABILITY Customer profit margin = customer net profit customer revenues Customer revenues – Cost of goods sold – Allocated selling expenses = Customer net profit MORRIS & MORRIS SPARROW DESIGNS WHAT DO YOU DO WITH UNPROFITABLE CUSTOMERS? Try to make them profitable Move them to change use of activities to more toward profitability Charge extra for the special services As a last resort, drop the customer | TOPIC FOCUS ON CUSTOMER PROFITABILITY ARE ALL CUSTOMERS PROFITABLE? Sparrow Designs places a lot of rush orders What’s the potential impact of these rush orders on Bradley’s operations? Is there an extra cost to servicing these rush orders? Is there a cost to the sales rep’s time? By the way, Sparrow Designs orders $2 million a year RESEARCH SAYS The top 20% of a company’s customers generate 120% of the company’s profits The bottom 20% loses as much as 100% of the company’s profits. So what would happen if the company dropped those bottom 20% customers? WHAT IS CUSTOMER PROFITABILITY? It is not just the gross profit generated by the customer You need to consider all the costs of servicing the customer This means all the selling and administrative costs must be included in the profit analysis Think ABC STEPS TO CALCULATING CUSTOMER PROFITABILITY Identify all selling activities Develop selling activity cost pools Calculate selling activity cost pool rates Allocate selling costs to customers Calculate customer profit margin to include selling costs as well as cost of goods sold MEASURES OF CUSTOMER PROFITABILITY Customer profit margin = customer net profit customer revenues Customer revenues – Cost of goods sold – Allocated selling expenses = Customer net profit MORRIS & MORRIS SPARROW DESIGNS WHAT DO YOU DO WITH UNPROFITABLE CUSTOMERS? Try to make them profitable Move them to change use of activities to more toward profitability Charge extra for the special services As a last resort, drop the customer
