Page 66 - DMGT308_CUSTOMER_RELATIONSHIP_MANAGEMENT

Unit 3: Analysing Profitability of Customers

does not contribute equally to the firm’s profitability. Customers utilise company resources Notes
differently; thus customer costs vary from one customer to another. The following issues should
be considered when analysing customer profitability:
1. how to develop reliable customer revenue and customer cost information;
2. how to recognise future downstream costs of customers;
3. how to incorporate a multi-period horizon in the analysis; and

4. how to recognise different drivers of customer costs.
This requires a broader examination of the costs associated with customer service. For example,
post-sale customer service costs must be included in any analysis of customer costs. Some
customers require substantially more post-sale service than others. In addition, future
environmental liabilities related to the sales of current products are additional downstream
costs that must be included. With management’s increased focus on customers, this analysis can
provide forward looking information about individual customers and customer segments and
more broadly examine both the revenues and costs related to customer transactions. Revenues
can vary among customers due to variations in volume levels, and differences in price structures,
products and services.
Costs can also vary depending on how customers use the company’s resources such as marketing,
distribution, and customer service. Unless a complete analysis of the benefits and costs of customer
relationships is undertaken, companies will unknowingly continue to service unprofitable
customers. Only after a thorough analysis of the costs and benefits can a firm decide which
customers to service and strategically price its products and services. There are many costs that
are often hidden within the production, support, marketing, and general administrative areas.
To better understand customer profitability these costs should be examined and assigned
appropriately using ABC methods. These currently hidden customer costs may include items
such as:
1. inventory carrying costs;

2. stocking and handling costs;
3. quality control and inspection costs;
4. customer order processing;
5. order picking and order fulfilment;

6. billing, collection and payment processing costs;
7. accounts receivable and carrying costs;
8. customer service costs;
9. wholesale service and quality assurance costs; and

10. selling and marketing costs.
ABC was recently used by a telecommunications company to improve customer profitability.
The company developed a process for identifying the drivers of training costs, which is an
important component of the company’s contract bids. The company’s activities included the
submission of bids to large organisations for the installation of telecommunications systems.
The bids were reasonably accurate in estimating the cost of the equipment hardware, the
installation cost of the new equipment, and the programming costs. However, the cost of training
the customer’s employees about the new equipment was more difficult to determine.

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