Page 55 - DMGT308_CUSTOMER_RELATIONSHIP_MANAGEMENT

Customer Relationship Management

Notes 3.1.1 Customer Profitability Management (CPM)

Managing profitability requires not only a customer-centric focus but also a thorough
understanding and effective management of customer profitability. Customer profitability
management is a strategy-linked approach to identifying the relative profitability of different
customers or customer segments in order to devise strategies that add value to most profitable
customers, make less-profitable customers more profitable, stop or reduce the erosion of profit
by unprofitable customers, or otherwise focus on long-term customer profitability.

Managers are often surprised to find out that a small percentage of customers generate
substantially more than 100% of profits, and the remaining customers are either breakeven or
unprofitable. Using a customer profitability management system replaces intuitive impressions
of customer profitability with fact-based information and supporting analysis.

The backbone of a CPM system is a costing system that is focused on tracing and causally
assigning costs to each customer or customer segment without arbitrary broadly averaged cost
allocations. Assigning revenues to customers or customer segments can present a few issues, but
the major challenge in implementing a CPM system is the selection and implementation of an
accurate and informative costing system. A costing system should not only accurately assign
product costs and gross margin to customers or customer segments, but it should also assign the
costs to serve.
Cost accuracy and visibility are important in CPM. Using Time-driven Activity-based Costing
(TDABC) provides costs that identify resource consumption by customers or customer segments.
The signals provided by the CPM system, based on full costing of traceable costs to customers
and making visible business-sustaining costs, will lead management to consider strategies to
increase profits. The signals do not provide answers in themselves, but they could lead to
generating alternative courses of action. Decisions related to customer profitability strategies
require tailor-made analysis.

There are system issues that must be considered in the design and implementation of a CPM
system. Awareness of the commitment of time, financial, and personnel resources required by
a CPM system is critical to its success.
Investments in customers should be considered in view of an estimate of customer life value.
That is, in addition to current customer profits, the potential of generating future profits from a
customer should also be considered. Managing customer life value is a means to enhancing
long-term profitability.
Essential to the success of CPM is the buy-in by employees and managers who will be affected
by its implementation. Resistance to change is a phenomenon that applies equally to CPM as it
does any other organizational change. To develop the CPM system and then seek the support of
employees and managers is not likely to result in developing a sense of ownership, nor will it
guarantee an effective CPM system. To get employees and managers to buy in at the outset, they
should be involved in its development and their ideas must be sought. Only with a sense of
ownership will the organization be able to navigate the troubled waters of change.
Customer Profitability Management focuses upon an organisation’s most profitable customers
and products with the aim of improving “bottom line” performance. According to Marko
Seppanen and Jouni Lyly-Yrjanainen (2002) of the Cost Management Centre at the Tampere
University of Technology, over the past decade the focus of management accounting has shifted
from product based costing towards customer profitability management. The authors cite a
Connolly and Ashworth (1994) statement that profitability analysis in its development has
moved through three distinct phases i.e.:

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