Different types of customers are meant to interact with your business in different kinds of ways. That means the revenue and extract costs they drive will be unique. It is important for you to know where exactly you stand with every customer in terms of profit generated.
What is Customer Profitability Analysis ?
Customer Profitability is essentially a measure of how profitable a specific customer is. It compares how much revenue a particular customer generates with how much your company spends on acquiring or retaining that customer. The spending can be in time, resources, or other costs.
Customer profitability analysis allows you to segment your customers by their profit contribution to your business. The customer journey has various touchpoints and Customer profitability is the profit across every touchpoint that the customer goes through.
Why Measuring Customer Profitability Is Important?
Profitability is every business’s goal, even yours. By analyzing Customer Profitability, the company will gain a more accurate insight into which customer or even a customer segment drives the most profit.
Measuring customer profitability is crucially important if you want your business to succeed continually. This is because it helps determine whether certain customers are costing you more money rather than making you money.
Questions to ask yourself about your customers
Customers costing your company money usually come down to the servicing costs associated with a given segment. You must consider the following questions as they relate to your customers:
- Do you have certain customers who call customer service frequently?
- Are there customers who have special requirements for fulfillment that cost more in labor and fulfillment costs?
How to calculate Customer Profitability?
Profitability comes from loyalty, productivity, and having a character base from which to work.
Zig Ziglar
To calculate Customer Profitability Analysis, you’ll need to analyze a lot of data but being specific it starts with two. The annual profit per customer, and the total duration a customer stays with your business.
Annual profit = (Total revenue generated by the customer in a year) – (Total expenses incurred to serve the customer in a year)
Customer Profitability Analysis = (Annual profit) x (no. of years customer stays with the company)
Steps
Identify your touchpoints
The first step to measuring customer profitability is understanding your business expenses and all touchpoints that your customer might interact with within any area of your company.
Segment your customer costs
Some businesses have well-defined customer segments. This may be based on the size of the business. If you don’t have these customer groups easily defined, you can define them now.
One of the simplest, most effective ways to do so is through buyer personas.
Find the data
After you’ve segmented your customer base, you’ll need to find the data relevant to establishing customer profitability. You want to see how much your personas spend versus how much they cost your business.
Benefits of Customer Profitability Analysis
Sales
A customer profitability analysis puts a new degree of insight into your sales process. It can help you from pursuing prospects that will have underwhelming returns or possibly even lose you money.
Customer Service
Your company has a fixed amount of service resources and certain segments within your customer base that are more profit-making than others. You should still offer exceptional customer service to everyone using your product or service. Like you can offer more profitable customers shorter wait times, more direct lines to your staff and much more.
How to Improve Customer Profitability
Striving to improve customer profitability is an ongoing effort. The first and probably easiest action to take is to maximize your most profitable customer group.
Evaluate the necessary resources, budget, and requirements to grow this customer segment.
Ask questions like, What proportion are they of your total business? Could they be bigger, and how?
That doesn’t mean you should abandon all other customer segments. Suppose segment A costs more money than Segment B, it doesn’t mean you should never sell to Segment B again. There are areas that could improve these metrics.
Read More- Segmenting your customers
Conclusion
Customer profitability is an absorbing and valuable metric to consider when structuring your sales, marketing, and service efforts. That being said, you shouldn’t look at the metric as the end-all-be-all of how to approach your customers. You still need to provide the ideal service to anyone you do business with.
