consumer profitability

Back in 2007 Sprint had to fire some of their clients because of their bad habit to call in to customer service on a regular basis. Sprint released a statement saying that, “While we have worked to resolve your issues and questions to the best of our ability, the number of inquiries you have made to us during this time had led us to determine that we are unable to meet your current wireless needs.” However, this is not unique to the Telecommunication industry. Every company has unprofitable customers; whether it be because the client calls in for help more than they are worth, or their purchase volume is just not big enough. Understanding what consumer profitability is, how it is measure, and its benefits can help a company identify which customers are profitable.

What is Consumer Profitability Analysis?

Being able to analyze certain consumers that you might think cost more than they are worth; could mean the difference of survival between your company and the competition. So, what exactly is Consumer Profitability (CP)? Basically, how much does one client or groups of clients contribute to your bottom line whether positively or negatively. Again, not ever company measures their CP, but all companies have unprofitable consumers.

Identifying the Kind of Consumer to Measure

Before understanding how to measure CP, the company should first identify what clients are they measuring. To keep things simple, lets focus on three kinds of customers.

  1. The discount customers. The company provides goods and services to this client; however, the client has asked for several discounts and bargains to keep their account at the company.
  2. Small dollar customers. This client does not ask for discounts or bargains, but they place very small orders on a frequent basis.
  3. High customer service but low profit or sales customers. This kind of client requires high-touch and frequent customer service support. The company provides unlimited customer support, yet there are certain customers that over use the service.

What happened to Sprint back in 2007 is example of client #3, customers over using customer support to the point of unprofitability. Companies that tend to cast a wide and distracted net rather than a narrow and focused fishing line to acquire consumers will suffer from one of the three customers types. All three kinds of customers can be potentially unprofitable, depending on the cost. This leads to unprofitable consumers.

How to Measure Consumer Profitability?

Once the company has identified its consumers, the next step is applying an analytical costing method. One of the best methods for CP is time-driven, Activity Based Costing (ABC). For the types of customers listed above the analysis can be boiled down to two drivers. According to a recent article in the Harvard Business School the these parameters are, “the cost per hour of each group of resources performing work, such as a customer support department; and the unit times spent on these resources by specific activities for products, services, and customers.” For example, the cost of the Loglogistic department is $100 an hour and the time spent by the team to finish customer t’s A order is about 2 days. Then the total cost would be $4,800. If the revenue yield is less than $4,800 than client A is unprofitable.

However, just doing this for a brief period will not give any company adequate amount of information to come to a clear conclusion of CP. My recommendation is to measure the profitability for at least 12 months looking back and then based on the prevailing trends forecast the next 4 months Nonetheless, comparing the profitability trends of all or at least a large amount of the company’s clients will give a solid foundation to make decisions.

Benefits of Consumer Profitability

Apart from identifying the unprofitable consumers and getting rid of them. CP can also help the company focus more on certain clients and increase efficiency across the company. Once the company identifies the unprofitable clients, it now has a clearer view of what kind of clients it wants to target. In can also work to develop cross selling opportunities to the unprofitable customer, develop new service offering and pricing structures to take move the unprofitable customers to profitability. Knowing who the existing high value customers are, the company can now target new clients that fit the description of the with more confidence in their profitability.

Furthermore, the act of simply removing low profit and high maintenance clients will have ripple effects throughout the company. The sales team will be able to quickly recognize potential client profitability. The finance department will have an increase in productivity since they only work with consumers with reasonable service demands. Costly unique payment terms and last-minute add-ons will significantly decrease, and in turn help the bottom line.