Customer profitability analysis (CPA) can be defined as a method used to compare the costs of all the activities used to support a customer or a customer group with the revenue generated by that customer or customer group. It is the analysis of the revenue and costs that relates to the customers which can be determined by considering the similarities and differences in customers’ buying behaviours and customer preferences. From the definition, it shows three features of customer profitability analysis. First, customer profitability analysis assigns the costs to individual customers rather than products, services or departments. It allows management to determine which of the customer is profitable or if the company should charge a higher price. Second, customer profitability analysis can be used at aggregate level or disaggregated level. It allows the management to analyze a particular customer or a large group of customer at one time. Third, customer profitability analysis change from product focus to a customer focus which focus on multiple products sold to a single customer rather than a single product sold to many customers. It will allow management to identify the downstream costs of the customer and thus make a strategic decision on which customer that company want to target.
DIFFERENCES OF CUSTOMERS.
All the customers are different and this can be due to differences in revenue charged to the customers and the differences in costs used to service the customers. Differences in revenue can be arise because customers are charged different prices when the company operates in the different markets, customers are given different discounts, sales volume are different or different products purchased by the customers. Differences in customer costs arise from the way customers use company’s resources by using the downstream activities which can be divided into four customer groups. First, the customers are different because of customization of products. Some customers may require additional features to be added to the products. For example, some customers at Pizza Hut might request additional item to be added into their pizza such as adding more cheese or extra sauce. Second, marketing and selling activities. Some customer may prefer to purchase products through online and some of them may prefer to purchase from sales agent through direct calls. Customer who makes frequent order will use more resources than those who make infrequent order. Third, products can be offered through many distribution channels. Some customer may purchase products directly from the company, some of them may purchase from warehouse, agents or internet. For example, in Malaysia there are a lot of company that provide courier services such as Pos Malaysia to deliver the products to customers. Lastly, there are differences in customer support activities that are offered to the customers such as technical support, training, on-site visits and help lines. It is not depend on the products sold but it depends on particular customers. For example, if there is a problem incurred on the product, the company will send their staff to provide with repairing and maintenance services.
CUSTOMER DRIVEN ACTIVITIES
Before management can calculate the customer cost, management need to recognize first the hierarchy of customer driven activities so that it can help management assign the cost to each of the customer group more accurately. Customer activities are the activities that facilitate the customer from taking customer order until delivered the product to the customer. There are three levels of customer driven activities i.e. order level activities, customer level activities and market level activities. The first level is order level activities, it is triggered each time an order placed by the customer. These activities are driven directly by selling and delivered the product to the customer. It means that this...