Check out Part I of this article
Ways to quantify
It is now established that customer profitability (CP) enables us to understand high yielding customers from a pool of consumers. However, to measure customer profitability, there are several ways to quantify the same. In simple words, CP can be calculated as the difference between revenue and total costs involved in acquiring the consumers. To achieve the same, one of the most widely used measures is Activity Based Costing (ABC).
Activity Based Costing (ABC)
ABC is an accurate way to understand the allocation of costs and profitability. With the growth of new accounting systems and data analysis tools, the ability to analyze profitability has grown. These new-age tools allow brands to create individual portfolios of customer and their product lines for a better profitability measure. Essentially, ABC can be derived by compiling three essential aspects of a company
- List of all activities of the brand
- List of all the cost associated with the activities
- Allocating costs to customers
By allocating corresponding costs to respective customers, brands can understand which of the channels or cost spent is higher than the yield thus ensuring a smooth connection between cost and profit. With this difference depicting CP, brands can reiterate their steps for cost efficiency.
Introspect of customer profitability
Having understood the process of ascertaining CP for a brand, it is important to introspect the importance of customer profitability. With growing competition, customers have limited brand loyalty. Due to the presence of innumerable communication channels between the brand and the consumer, it is difficult to identify customer spends. However, CP can give clarity in three pivotal aspects including
- Cost-profit accuracy
- Appropriate cost channel identification
- Decisions based on facts without assumptions
Over the years, brands have found several positive advantages of measuring customer profitability including
- Ability to identify and align services in line with policy and strategy
- Proactively scrutinize profits for better spend utilization
- Challenge status quo of current structure to maximise customer proposition
conclusion
In conclusion, it has become evident that marketers and brands should invest in ascertaining customer profitability for better utilization of cost resources. With CP, marketers can also track their audience presence and create a more advanced tactical plan that addresses the customers directly and precisely.
