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Customer Profitability Revisited

A strategic initiative for finance executives
Companies must develop a focused, consistent approach to managing customer profitability that incorporates four essential elements:

Strategy: What is the corporation’s strategy and which customer profitability options are best suited to this strategy? A company pursuing a “fashion leader” strategy will likely take a very different approach than one going the “low cost” route.

Analytics: Understanding economic profits from individual customers or customer classes can be the single biggest challenge facing a company’s customer profitability program. Developing frameworks and specific recommendations for this analysis must be a priority. In some cases the most appropriate metric may be a simple contribution margin on a single transaction; others may require a more involved set of data that examines various costs over a customer lifecycle. Information Technology: What data are necessary to assess profitability? Are they available on a timely basis? How should data be collected and stored? While many companies have most of the information needed to manage customer profitability, they still face obstacles including not having all the information necessary, the information not being accessible to the right people, and a problematic IT architecture. At the same time, it is important to avoid overcomplicating data collection to the point that it becomes a roadblock (i.e., where “better” is the enemy of “good enough”). Those driving the initiative must have basic tools for understanding IT requirements and assessing alternatives.

Implementation: Every company will face different issues when it applies its customer profitability strategy. As a rule, narrowly focused customer profitability projects are far easier to put into place than those that are broad based. However, these must be designed and executed from a corporate perspective, otherwise they either can fail to enhance overall performance (because they fail to consider all costs) or will not confer strategic or long-term competitive benefits (because they are inconsistent with the company’s strategy).

Assessment

Ventana Research believes effective management of customer profitability will be an important differentiator of performance over the next three years. We advise companies to address customer profitability at a corporate level instead of taking a silo approach. In our judgment, CFOs should take the lead in shaping, organizing, and coordinating these efforts, both in order to give initiatives a senior level focus and because the resources required for analysis and implementation can be found in the finance organization. Information technology will be one of several key components to the success of customer profitability initiatives, enabling corporations to gain important insights into what drives margins and allowing them to measure how well the initiatives are paying off.