Managing Customer Profitability

Determine which customers are most valuable to your organization.

December 2008
by Marc Epstein, et al./Journal of Accountancy

All people may be created equal, but the same can’t be said for customers. Everyone knows that some customers are more profitable than others. Conversely, some are downright unprofitable. Knowing which is which is the all-important question.

Despite enormous variations in profitability, many companies continue unprofitable relationships with customers, often providing them with pricing and service levels identical to those received by the most profitable ones. Why? In most cases, companies simply do not know who the unprofitable customers are. As such, they cannot develop marketing strategies or manage costs accordingly

Companies don’t necessarily need a state-of-the-art database or analytics technology to improve customer profitability. Rather, they can follow a comprehensive approach for measuring and managing customer value called the customer value management cycle (see Exhibit 1). Because of their unique qualifications and abilities, financial managers should take the lead in translating analysis to action and creating the culture of value.

The customer value management cycle has five recurring steps.

This article has been excerpted from the Journal of Accountancy. View the full article here.