Page 64 - DMGT308_CUSTOMER_RELATIONSHIP_MANAGEMENT

Unit 3: Analysing Profitability of Customers

3.2 Base Profit Analysis Notes

Base profit is the difference between sales revenue generated by a specific product or service and
the cost to produce or provide the product or service. To a customer, value involves the expected
benefits and costs of a product or service, and the customer’s perception is of significant relevance.
The expected benefits are derived from the product and service attributes and the expected costs
include the transaction costs, the life-cycle costs, and the risk. Transaction costs are typically the
immediate financial outlay, which includes the price, delivery, and installation costs. The lifecycle
costs are the additional expected costs that the customer will incur over the life of the product.
The risk is associated with the lifecycle costs. Conceptually, the profit levels generated by
customers due to retention, related sales, and referrals are shown in Figure 3.1. Customers do
not determine corporate strategy, but their values and expectations for the company’s products
and services are influential.

Figure 3.1: Customers Are More Profitable Over Time

Source: Heskett, Sasser and Schlesinger 1997: 64.
Organisations place great value on their customers and depend on them for long-term viability.
Five fundamental customer value axioms apply to most companies and help explain a customer’s
value to the firm:

1. the customer defines the product quality, service quality and acceptable price;
2. customers form their expectations relative to competitive alternatives;
3. customer expectations change, usually upward;
4. product and service quality must extend throughout the value chain; and

5. maximising customer value requires that the whole organisation be involved.

Did u know? Fed Ex analysed the profitability of the 30 large customers that generated
about 10% of the total sales volume. The company found that certain customers, including
some that required a lot of residential deliveries, were not bringing in as much revenue as
they had agreed to initially when they negotiated discounted rates. The company increased
the rates for some customers and lost those who would not agree to the rate hikes. In this
case the focus is not merely on customers, but on profitable customers.

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