LALI Business Consulting Pty Ltd

Buidling better business for today and the future

Customer profitability analysis

What is customer profitability analysis (CPA)?

CPA is part of the business analysis and help businesses to measure the profit derived form each customer. It is the difference between the revenue generated from a customer and the costs associated with the customer in a given period.

What are the key benefits of CPA for business?

Understanding individual customer profitability can help you target high-value customers and tailor products and service offerings to their specific needs. A closer look at individual customers can help transform your bottom line. Knowing which customers add to your profitability is just as important to your bottom line as identifying those who do not. Some other benefits include:

  • Empower management to make decisions that boost profits.
  • Better prioritise customer service to attract and retain high-value customers.
  • Optimise marketing spend.
  • Improve retention and loyalty campaigns results.
  • Increase sales through personalised offers.

What are the key things to consider in measuring customer profitability?

Although it appears to be a straight forward process, it is quite important to start with clear definitions as to how to approach measuring customer profitability. It is important to identify the revenue associated with the customer, direct and indirect costs. The methods of measuring profitability has important implications on making marketing, pricing and servicing decisions and your bottom line.

Consider the following factors when starting implement CPA analysis in your business

  • Definition of customer unit. (Eg: Retail customer, Trade customer, On-line customers, store customers).
  • Existing or prospective customer. Profitability can be measured for both existing and prospective customers.
  • Determine whether the customer is an “Active” customer.
  • Allocation of variable costs.
  • Allocation of customer acquisition costs.

Using CPA business can identify, attract and retain it’s most valuable customers and improve their present and future bottom line. Incorporating customer profitability analysis in strategic planning can also offer insights into overall long term strength of your business.

Businesses can use this modeling to understand their customers and advise them on right products/services and help improve cusotmers’ bottom line and making CPA a win-win for all.

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This entry was posted on 18/01/2012 by in Business Analysis.

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