Calculating Customer Profitability

This chapter deals with the calculation of customer profitability. Customer profitability is measured as the revenues, minus product costs and costs to serve, that the company received from the customer in the previous year. The building block of customer profitability is individual customer profitability analysis. This means customer-by-customer analysis of revenues and costs. Individual customer profitability analysis is the most appropriate method where an organization has a few large customers. The four elements of the customer profitability analysis calculation are customer revenues, cost of goods or services sold (COGS), costs to serve and customer-specific overheads. To complete the customer profitability analysis calculation, the cost elements need to be subtracted from customer revenues. Once the customer profitability analysis has been completed for all customers, it can be used to help with three marketing decisions: customer dependency, balancing customer acquisition and customer retention and understanding payback period.