MANAGEMENT

Customer Profitability Analysis

Customer Profitability Analysis

Introduction

The term customer profitability analysis can be defined as the distribution of costs and revenues to customer fragments such that the profitability of fragments can be premeditated. It is a fact that all organization know about their revenues from customers but there are many firms which do not exactly know the costs associated with each segment of customer or individual customers. The traditional management accounting is not very helpful in identifying the cost associated with each customer, particular product line and customers segment.

Theory behind CPA

There are two main reasons behind the increasing trend of customer profitability analysis. First, there has been a significant change in the recording of the costing which is due to emergence of activity based costing. The activity based costing enabled the organization to identify the cost attached to each activity. The activity based costing let the organization know that which product is consuming more resources as compared to other products. This is due to activity based costing that the organization can have a true and fair view about the costs associated with each product. This helped the researchers and theorist to develop a customer profitability analysis. Second, information technology assists the organizations to record the comprehensive and complex data relating to the costs because there are many cost drivers which are overlapping in production of different products. Therefore, the organization can record the widely dispersed data in a very structured form. The evolution of the customer profitability analysis is the result of the aforementioned points (Bruhn et.al, 2008, pp. 1295).

Key Features of CPA

The key features of the customer profitability analysis stretch out in the insight it offers in the irregular allocation of costs and revenues over customers. There are three areas of management which are benefited by the use of customer profitability analysis such as cost management, revenue management and strategic marketing management.

Cost Management

The CPA helped in cost management by unrevealing the opportunities for targeted cost management. This assist in evaluating the production process in term of costs associated with them. Therefore, the mangers can decrease the costs for profit improvement. The researchers and theorist claimed that the 20 percent of the customers usually generates 80 percent of the profits. This clearly indicates the need of customer profitability analysis because the rest of the 80 percent customers are not profitable but the overall picture is making the management satisfied. Therefore, there is a big need of making sure that each customer is giving profits. The operations or geographical locations which are not offering profits must be considered for revision. It can be only possible by implementing CPA along with activity based costing which is also known as pre-requisite (Gleaves et.al, 2008, pp. 830)

Revenue Management

The company's need to have certain promotional plans such as discounts and bonus plans to induce the customers. The pricing decision is very important for the company because this is the primary driver of the revenue so the price must be calculated accurately and includes ...