Customer Profitability Is Not A Financial Metric - InformationWeek
Government // Enterprise Architecture
01:00 PM
[Dark Reading Crash Course] Finding & Fixing Application Security Vulnerabilitie
Sep 14, 2017
Hear from a top applications security expert as he discusses key practices for scanning and securi ...Read More>>

Customer Profitability Is Not A Financial Metric

Try treating customer profitability as a demand chain metric, not a financial measure.



Demand chain performance improvement initiatives with a customer-centric focus take on additional color when built upon a customer profitability foundation. And yet there remain barriers to the rigorous application of customer profitability at many organizations. Ventana Research recommends that treating customer profitability as a demand chain metric, not a financial measure, is one path to overcoming many of those barriers. Barriers to reaching cultural and functional consensus have a different texture with a demand chain mind-set, and the proper application of enabling technologies can still provide the foundation for the more precise requirements of CFOs. Ventana Research advises organizations to take an incremental approach, refusing to accept imprecision as an excuse for inaction.


Performance improvement strategies built on customer profitability measurement make so much sense that it is remarkable that they are not the norm. One barrier to adoption is that initiatives must begin with business metrics that matter. In most organizations, relevant data exist, though not often in the form or format needed, and clearing the hurdles that lie in the path to understanding customer profitability often requires that the organization accept a degree of imprecision in its measurement. Solutions often involve estimation and judgmental allocation, which is anathema to many CFOs, particularly in today's business climate. Ventana Research therefore recommends that companies initially attack the tough issues outlined here as non-financial demand chain problems in order to combat organizational inertia.

Defining "customer." The challenge of simply defining the customer dimension confounds many organizations. Functional perspectives on the customer differ in demand chain, finance and elsewhere, often with justifiable logic. Within silo-ed applications, an appropriate definition of "customer" in functional context is often self-evident. It's easy to rationalize sub-optimal solutions in deference to project deadlines and other pressures. The result can be inconsistency across applications, even within a business area.

It is our belief that companies must reconcile these inconsistencies and address them with a little work by a committed organization. A small group of business and IT representatives can be chartered to conduct a requirements gap analysis and outline a small number (three is a good choice) of options aimed at short-term resolution consistent with best practices and organizational objectives. These options can then be brought to a cross-functional decision-making body for final arbitration.

Customer data integration. This endeavor has been known to occupy entire careers. Issues abound with respect to physical and logical integration. Much has been written about both, and a number of vendors offer solutions. The point in highlighting the topic here is simply to suggest that an elusive ideal business solution should not prevent pursuit of what is immediately doable. If nowhere else, customer data is almost always retrievable in some form from sales and order processing systems — a "bill-to" designation for instance. This can provide a jumping-off point for debate if other options don't present themselves; a catalyst for evaluation of other systems and viewpoints.

Value metrics. With some customer dimension as a reference point, relevant metric definitions on that dimension can be pursued. Two metrics commonly applied are customer lifetime value and customer profitability. Lifetime value as a concept comes from marketing, especially direct marketing circles. Customer profitability has financial roots. The latter is arguably an extension of the first, accounting for costs as well as revenue.

1 of 2
Comment  | 
Print  | 
More Insights
Newest First  |  Oldest First  |  Threaded View
How Enterprises Are Attacking the IT Security Enterprise
How Enterprises Are Attacking the IT Security Enterprise
To learn more about what organizations are doing to tackle attacks and threats we surveyed a group of 300 IT and infosec professionals to find out what their biggest IT security challenges are and what they're doing to defend against today's threats. Download the report to see what they're saying.
Register for InformationWeek Newsletters
White Papers
Current Issue
2017 State of IT Report
In today's technology-driven world, "innovation" has become a basic expectation. IT leaders are tasked with making technical magic, improving customer experience, and boosting the bottom line -- yet often without any increase to the IT budget. How are organizations striking the balance between new initiatives and cost control? Download our report to learn about the biggest challenges and how savvy IT executives are overcoming them.
Twitter Feed
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.
Flash Poll