Customer Profitability Management
Customer profitability management impacts upon customer relationship management, product promotion, pricing, and billing and incorporates a high degree of. Customer Profitability and Customer Relationship Management at RBC Financial Group (Abridged). The study suggests that pursuing customer profitability has limited effectiveness Customer relationship management (CRM) processes are becoming widely.
Accounting systems exist in proud isolation from each other due to fragmented corporate operations. This makes it very difficult to create a single, company-wide customer view, as no common customer identification method exists.
Obviously these characteristics inhibit customer-profitability analysis as all cost differences between customers are disregarded.
Inevitably, this leads to distortions. Profitable customers are lost through overpricing, unprofitable customers won by underpricing, and unprofitable customers subsidized through profitable ones. In short, customer relationship management becomes a pipe dream, as it is not possible to manage what cannot be measured.
Reuniting Cost and Customer To remedy this situation companies have to focus on restoring the connection between customers and costs. Methods to do so range in complexity from as broad and simple as using percentages of sales, to developing intricate allocation methods based on actual activities that incurred the costs.
The key points to consider are: Tackle the more nebulous ones later. Sure they will be off, but with experience and time you can replace them with research-based numbers. That way they can be rolled up in many different ways. Overall, keep in mind that just like conventional profitability analysis, determining customer profitability is not science but quest; there will never be one correct number for a customer's profitability.
Customer Profitability and Customer Relationship Management at RBC Financial Group
Thus, the chief concern is not pursuing the most precise measurement, but consistency in the application of cost assignment methods. Involve the Whole Company Contrary to traditional accounting practices that champion the separation of organizational responsibility, CRM encourages teamwork through cooperation and coordination.
Therefore, the creation of customer-profitability measurements involves the whole company.
Clear-cut definitions of customers, costs, revenues, and profits accepted by all business groups have to be created. This is especially important, as CRM collaboration will undoubtedly result in interdependent revenue and cost flows; the actions of one business group effect the performance of another, and vice versa.
Customer profitability - Wikipedia
Aim to create a consensus that is general enough to be widely accepted, yet specific enough to be useful. Best Advice In regards to the difficulty of the implementation, realize that there are many different ways it can be done.
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- The Art of Customer Profitability Analysis
- What is Customer Profitability and Why Should We Measure It?
Personally, I don't believe that complex solutions are necessarily the best. Complexity usually crushes flexibility, because change becomes difficult. Realize that much of the raw material to trace costs to customers exists in your systems, albeit in forms requiring transformation. For example, customer transaction histories show all orders, returns, and collection efforts.
Companies commonly look at their performance in aggregate. A common phrase within a company is something like: Although this is a natural consequence of variability in profitability across customers, firms benefit from knowing exactly who the best customers are and how much they contribute to firm profit.
At the other end of the distribution, firms sometimes find that their worst customers actually cost more to serve than the revenue they deliver. 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.CRM: Making it work