Measuring and Managing Customer Profitability (PowerPoint PPT)

The only value a company will ever create for its shareholders and owners is the value that comes from its customers ? current ones and new ones acquired in the future. To remain competitive, companies must determine how to retain customers longer, grow them into bigger customers, make them more profitable, serve them more efficiently, and target acquiring more profitable customers.

Customers increasingly view suppliers' products and standard service lines as commodities. This means that suppliers must shift their actions toward differentiating their services, offers, discounts, and deals to different types of existing customers to retain and grow them. Further, they should concentrate their marketing and sales efforts on acquiring new customers who have traits comparable to those of their relatively more profitable customers.

As a result of this shift from being product-centric to customer centric there needs to be an increased emphasis on measuring current and future potential profitability of products, standard service-lines, channels, and customers. (For business to consumer (B2C) industries, there is need to also consider applying of "customer lifetime value (CLV)" metrics.)

A mind-shift is needed from pursuing increased sales volume at any cost ? to profitable sales volume. Cost accounting leveraging business analytics is essential to achieve this result. Organizations realize it is substantially more expensive to acquire new customers than to retain existing ones. This focus on customer retention combined with the recognition that spray-and-pray mass marketing of products and service-lines is being eclipsed by direct one-to-one to marketing with customers and prospects is causing the need for the marketing function to require financial data on customer profits and future value. Why? Because given any company's scarce resources, it should attract its relatively more profitable customers rather than high maintenance ones whose substantial cost-to-serve erodes profit margins.

Which types of customers are worth more to retain, grow, acquire, or win-back? And types are not worth pursuing? And how much should you optimally spend on each type of customer micro-segment?

The Internet is irreversibly shifting power from sellers to buyers. Suppliers must react. Earning, not just buying, customer loyalty is now mandatory. A popular term in CRM circles is customer lifetime value (CLV) ? measuring each customer as if they are an investment with an ROI. Is this another fad or a real need?

This presentation is ideal for managers aiming to integrate profitability metrics into decision support systems. It addresses the challenges of traditional accounting methods and emphasizes the need for a shift towards predictive analytics.