Insider Business Club: maximising customer profitability

Given activity-based costing is at the heart of measuring profitability,
are most companies already monitoring it?

Richard Barrett, director of product marketing financial performance
management, Business Objects

It is something that people should have been focusing on for some time. The
pioneering companies who did this and adopted activity-based costing to identify
individual customer profitability and customer segment profitability certainly
got themselves some useful information. And many of them have stuck with it for
a couple of decades now.

What continues to amaze me is how many large enterprises don’t really have a
rigorous approach. Considering the role of the management accountant today is
not so much about producing numbers and is really about helping business
managers make better informed decisions, this is one of the key areas. How do
you price things? How do you manage discount strategy? How do you manage channel
strategy? How do you guide marketers in terms of customer acquisition, if you
don’t know which ones are profitable and which ones are not? The evidence is
that there is a huge gap to be filled.

Do companies that measure, do so reliably?

Mark Hixon, managing director, Consulting Associates

A number of people think they have customer profitability information, but
when people are involved with acquiring and servicing customers through a
variety of media, they don’t necessarily get to the right answer. For example,
does it cost a bank more to service a customer that’s been acquired through a
branch? Or does it cost more to service a customer who has been acquired through
the internet? A lot of companies aspire to have the data and I would say that
within the banking and the insurance sector, probably 50% to 60% say they’ve got
some form of customer profitability information.

When you actually work with them and try to understand the detail, however, y
ou find that their data isn’t that good, and they are not coming up with the
right numbers. So they don’t necessarily know how much it costs to service a
customer that was acquired through a branch, if that customer then goes on and
services themselves through the internet or through the telephone.

If you are going to produce proper activity-based costing, it has to be
treated as a business wide implementation.

Sit down with the people that are going to use the information and work from
the bottom up. What are they going to use this information for? How frequently
would they like this information? What level of granularity do they need?

What should you do with the information once you have it?

Peter Simons, technical specialist, CIMA

At the strategic level, it is very important to understand, by segment at
least, who your profitable customers are. In many industries some customers
cross subsidise others. These are customers you are making lots of money out of
and somewhere down the curve there a whole load of people that you lose money
from. You probably make 120% of your profit out of the top 20% of customers. The
other guys eat into it. And you can rest assured competitors are going to target
the ones you make the money out of, so you have got to keep those people
satisfied. Many of us have balanced scorecards which we are looking at customer

We all see the McDonald’s upsale. When you go into McDonald’s and you ask for
a burger and fries, the first thing they say is ‘will be is that a large fries’.
They have a fundamental understanding that once the customer is there, you’re
incurring the cost to serve. They are at the till, they’re taking their time,
the incremental cost in selling them something else that has maybe a 20p margin,
probably doubles the profit in that sale.

It is that kind of key understanding of where we can make extra sales. An
incremental effect on profit can be to double it and that’s why this is so very
important. They understand there is an opportunity to make unprofitable
customers profitable. We’ve talked about increasing price, but in banking the
big term they use the share of wallet.

Chaired by Damian Wild

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