Data collection method Analysis of marketing and accounting data as well as the output from activity based costing exercise Formula Customer profitability is the difference between the revenues earned from and the costs associated with the customer relationship in a specified period Put another way, customer profitability is the net dollar contribution made by individual customers to an orgnsiation As customer profitability covers several time frames, it is not in itself a single measure There are found primary measurements of customer values Historical value of a customer, which looks at the value earned from a customer relationship over an extended period of time, such as prior fiscal quarter, prior year or since the start of the relationship It can be measured as a simple average of previous periods or can be time weighted, placing higher emphases on recent periods Averaging in this manner has the effect of smoothing reported results for a customer, lending consistency to the reported values Customer Profitability Score Current value of a customer, which look to a shorter time frame, often a month (in order to concede with reporting cycles) Current value is often volatile, since cyclical factors in the relationship are often not reflected within a single month Current value has the advantage of highlighting the effects of changes in the customer relationship when compared to previous period current values It is most useful for quantifying the benefit of campaigns, new offers and pricing changes on customer value Present value of a customer, which is a future oriented measurement that typically considers the future revenue and cost streams of the customers existing business This measure is usually only extended to include the contractual lifetime of ongoing products or services Present value is useful for ranking customers according to value and determining such compensation rates, and is frequently used as a basis for modeling Example Here is an example of calculating customer profitability in a bank Establish the costs per customer using activity based costing models the bank has established ocsts for different customer services or customer interactions For example, mailing of statmenet $00, calling the banks contact centre $2 00, vesting the branches $3 00 it then estimates the behaviours of customers and might even be able to put them into different categories e g customers over 50 who are more likely to visit the branch However, to keep this example simple we say that on average a customer receives a statement one a month, visit the branch once a month and phones the contact centre once every two months This now means that it costs the bank on average (12 x $1 00) (12 x $3 00) (6 x $2 00) $12 $36 $12 12 60 per year to do business which an average customer Establish profit per customer In this example, the bank knows that on average it is able to generate a 3 5 profit on each dollar it can invest So if customer a has a deposit of $1,500 and customer B has a deposit of $15,000, the customer profitability looks like this Customer A Generate a profit of $1,500 x 0 035 $52 50 But overall is not profitable when subtracting the average costs per customers from the profits In this case the customer portability score is $52 50 60 $7 50 (a loss of $7 50) Customer B Generates a profit of $15,000 x 0 035 $525 00 And therefor a healthy profit In this case the customer profitability score is $525 00 $60 00 465 (a profit of $465) Customer Profitability Score Exercise If the average annual cost per customer of a software house is $1592, customer A generates a profit of $365, and Customer B generates a profit of $1425 Calculate the CPS and compare the results

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Data collection method Analysis of marketing and accounting data as well as the output from activity-based costing exercise. Formula Customer profitability is the difference between

Data collection method Analysis of marketing and accounting data as well as the output from activity-based costing exercise.

Formula

Customer profitability is the difference between the revenues earned from and the costs associated with the customer relationship in a specified period. Put another way, customer profitability is the net dollar contribution made by individual customers to an orgnsiation.

As customer profitability covers several time-frames, it is not in itself a single measure. There are found primary measurements of customer values.

Historical value of a customer, which looks at the value earned from a customer relationship over an extended period of time, such as prior fiscal quarter, prior year or since the start of the relationship. It can be measured as a simple average of previous periods or can be time weighted, placing higher emphases on recent periods. Averaging in this manner has the effect of smoothing reported results for a customer, lending consistency to the reported values.

Customer Profitability Score

Current value of a customer, which look to a shorter time-frame, often a month (in order to concede with reporting cycles). Current value is often volatile, since cyclical factors in the relationship are often not reflected within a single month. Current value has the advantage of highlighting the effects of changes in the customer relationship when compared to previous period current values. It is most useful for quantifying the benefit of campaigns, new offers and pricing changes on customer value.
Present value of a customer, which is a future-oriented measurement that typically considers the future revenue and cost streams of the customers existing business.This measure is usually only extended to include the contractual lifetime of ongoing products or services. Present value is useful for ranking customers according to value and determining such compensation rates, and is frequently used as a basis for modeling.

Example

Here is an example of calculating customer profitability in a bank.

Establish the costs per customer: using activity-based costing models the bank has established ocsts for different customer services or customer interactions. For example, mailing of statmenet = $00, calling the banks contact centre = $2.00, vesting the branches = $3.00. it then estimates the behaviours of customers and might even be able to put them into different categories e.g. customers over 50 who are more likely to visit the branch. However, to keep this example simple we say that on average a customer receives a statement one a month, visit the branch once a month and phones the contact centre once every two months. This now means that it costs the bank on average (12 x $1.00) + (12 x $3.00) +(6 x $2.00) = $12 + $36 + $12 = #12 = #60 per year to do business which an average customer.
Establish profit per customer. In this example, the bank knows that on average it is able to generate a 3.5% profit on each dollar it can invest. So if customer a has a deposit of $1,500 and customer B has a deposit of $15,000, the customer profitability looks like this:

Customer A

Generate a profit of $1,500 x 0.035 = $52.50
But overall is not profitable when subtracting the average costs per customers from the profits. In this case the customer portability score is $52.50 - 60 = - $7.50 (a loss of $7.50)

Customer B

Generates a profit of $15,000 x 0.035 = $525.00
And therefor a healthy profit. In this case the customer profitability score is $525.00 - $60.00 = - %465 (a profit of $465)

Customer Profitability Score

Exercise:

If the average annual cost per customer of a software house is $1592, customer A generates a profit of $365, and Customer B generates a profit of $1425. Calculate the CPS and compare the results.