Customer profitability and relationship management

customer profitability and relationship management

The Royal Bank of Canada uses customer relationship management and customer profitability tools to gain a competitive advantage in Canada's increasingly crowded financial services market. The case presents two pricing and customer management issues: one from the point of view of. Despite enormous variations in profitability, many companies continue unprofitable relationships with customers, often providing them with. Before spending a dime on customer profitability (or relationship based Managing value exchanges with your customers as a strategic process is just as .

Managing sales We were once asked to revamp the compensation program for a commissioned sales force. At the time, the or so sales people were generating a substantial negative net present value to the company. The solution we developed was to retarget the sales on which commissions were paid: The result was a turn-around from loss to profit to the tune of several million dollars a year NPV.

At the heart of the analysis was an understanding of customer profitability. Situations like this occur across many different industries where customers negotiate prices. Sales effectiveness is best monitored through a combination of activity measurements and results measurements. Activity measurements are needed to promote productivity and identify actions that can be taken to improve individual performance.

As management guru Tom Peters would say, this is about "doing the thing right. As measurement of customer profitability has spread, we hear similar findings echoed in a number of different industries. It is quite clear that acquiring profitable customers is a key to managing the margin and the bottom line of your business. Without a disciplined analysis of the profitability of your existing client base it is very difficult to tell which types of customers you should be identifying for acquisition.

All of the other target marketing information you presently use remains valid and useful: Having knowledge of customer profitability enables your company to manage and compensate the sales function for delivering value to the organization, rather than revenue or unit sales.

Managing service To avoid entering into a debate over the difference between sales and service, we will define service as providing fulfillment of the sales promise to your customers. Each industry is different in the way it provides service to customers but it is invariably an activity that provides value to your customers and cost to your organization. One of the key issues in managing service is the allocation of costly resources to customer service rationally.

For example, one Canadian energy services company established a policy of increasing the general level of reserved service "black-out" periods to create capacity.

This enabled reallocation of their trucks and technicians to more rapidly service their best customers without increasing overall cost. Understanding customer profitability offers a myriad of opportunities to you for managing the effectiveness of the resource allocation decisions you make concerning service.

In Canada, many industries have a bias towards providing all customers with equality of service levels. While this is one of the cultural attributes that makes us Canadian, it is absurd from a business perspective. Not all customers offer the same value to our companies.

Why then must we provide the same service to all customers? The answer may be complex in a regulated industry or one with a high public profile or public purpose, but in many for-profit corporations there is really no good reason that service differentiation cannot or should not be implemented.

Service differentiation opens up the potential to treat your best customers better and to save money by reducing the levels of service provided to customers who contribute less to your company's well being. Remember that there is a numbers game going on here: Altering service levels can take many forms.

It may involve alterations in reward and recognition program premiums; call wait periods; access to privileged locations, times or content; face time with staff; fast-track processing or just about anything else you can think of that might be valuable to your preferred customers.

What is Customer Profitability and Why Should We Measure It?

The key to affecting service level decisions is knowing two things: Measuring customer profitability can help you to answer both of those questions with facts. Managing product Product management is as necessary a discipline in a customer centric organization as it ever has been. Product managers have usually been blessed with access to some form of product profitability measurement which informs their management processes and thinking. Consequently, we rarely see product managers emerging as the proponents of customer profitability in companies.

We think this is unfortunate, as there is indeed opportunity lurking in this information for the product manager too. What the customer view brings to them is a deeper understanding of product interdependencies from a customer perspective.

Management of customer value demands that we also consider which of our customers are using the products or services we are making these decisions about. Where are the opportunities to optimize loss leaders for our preferred customers? Where can we create an opportunity for holistic relationship pricing? How much can we afford to give as discounts and to whom?

customer profitability and relationship management

Where can we raise prices without risking our key customers? What are the implications for new product development? These are the kind of questions our product managers need to be considering.

Customer Profitability Management

Managing operations Operations management is largely concerned with optimizing processes to achieve efficiency and effectiveness. This management challenge inevitably results in substantial change as new technologies and practices are adopted. One of the several insights that customer profitability can provide is to highlight which customers are affected by changes and the risk that the organization is taking by implementing operational changes. This is critical when evaluating risk and when communicating to customers about changes the company is implementing.

Another important way that customer profitability can be used in operations is in the evaluation of which processes and procedures are adding value to the company. For example, processes which involve few of the higher end customers have lower value than those that support large numbers of high end customers.

Ultimately operations processes can and should be measured in relation to customers and customer value. Managing finance In my years as a Financial Controller I was always amused by the budget setting process.

customer profitability and relationship management

It seemed to be a tug-of-war between the conservative projections of management and the Board which always demanded a far higher return. In the end, I always found the resultant plans to be somewhat dissatisfying, sort of like a cease fire called because we ran out of time for the war.

Did we have the kind of information we really needed? It also gives a much clearer direction to management than traditional planning measures. Although this is a natural consequence of variability in profitability across customers, firms benefit from knowing exactly who the best customers are and how much they contribute to firm profit.

At the other end of the distribution, firms sometimes find that their worst customers actually cost more to serve than the revenue they deliver.

What is Customer Profitability and Why Should We Measure It?

These unprofitable customers actually detract from overall firm profitability. The firm would be better off if they had never acquired these customers in the first place. Construction[ edit ] Customer profitability is the difference between the revenues earned from and the costs associated with the customer relationship during a specified period. In theory, this is a trouble-free calculation.

customer profitability and relationship management

Find out the cost to serve each customer and the revenues associated with each customer for a given period. While it is usually clear what revenue each customer generated, it is often not clear at all what costs the firm incurred serving each customer. Activity Based Costing can sometimes be used to help determine the costs associated with each customer or customer group. For components of cost not directly related to serving customers, the calculation of customer profit must use some method to fully allocate these costs to customers if the total of customer profit is to match the operating profit of the firm.