Customer Profitability Analysis

Customer Profitability

Smart marketers should always seek to establish strong relationship with profitable customers. Marketers have to bear so many costs and efforts for attracting, dealing and retaining customers. All such kinds of costs should be recovered for profitability. They should measure the profitability. They should focus on the lifetime stream of revenue and costs. In this regard, customer profitability is the difference between the revenues earned from and the costs associated with the customer relationship in a specified period.

Customer profitability is the result of applying the business concept of profit to a customer relationship. Measuring the profitability of a firm’s customers or customer groups can deliver useful business insights.

Customer Profitability Analysis

Marketers need to analysis customer profitability for corporate growth. A useful type of profitability analysis can be presented in the following figure:
Customer-Product Profitability Analysis
In above figure, columns represent customers and rows represent products. Each cell contains a symbol for the profitability of selling that product to that customer.

  • Customer 1: S/he is very profitable customer. S/he buys three profit making products. (P1, P2 and P4)
  • Customer 2: S/he yields a picture of mixed profitability. S/he buys one profitable product (P1) and one unprofitable product (P3).
  • Customer 3: S/he is losing customer because s/he buys one profitable product (P1) and two unprofitable products (P3 and P4).
Here, customer 2 and customer 3 are unprofitable customers for a company. The company can do the following activities about them.

  • It can raise the price of its less profitable products or eliminate them.
  • It can try to sell them its profit-making products.

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