Assigning costs in order to bring the lifetime value equation into the realm of customer profitability is a stiff test. Collecting and managing heterogeneous cost components, data integration, and dynamic maintenance of the pieces and parts, will test an organization’s cultural and technical will. Most organizations have a handle on product profitability. At the customer level, product-based unit cost and margin factors can be applied as a starting point. Allocations of cost of sales and general sales and administration (GS&A) expenses are more difficult challenges. Standard costing or activity based costing exercises are options. Process management, data capture, allocation methodologies, and, occasionally, probabilistic and judgmental modeling tools can each play a role in reaching resolution.
The process is one of incrementally building a robust profitability metric over time. In most financial circles, profit is a precise concept, with little allowance for the probabilistic estimation that is sometimes applied liberally. Thus, customer profitability is best treated as a metric in support of demand chain (marketing, sales and service) analysis and planning. Its status as a financial performance metric will come with time, after value is established and a higher level of rigor and precision is achieved.
Customer profitability definition and measurement necessarily involves cross-functional interests that compound the obstacles encountered. Compromise is unavoidable. Ventana Research suggests that companies take four critical attitudes into this organizational negotiation: