Mungo Dunnett Associates: Management and Marketing Consultancy

Customer Profitability

The main elements of the work

Moving from top-line to bottom-line data

The traditional measure of customers’ financial attractiveness is top-line billings: the revenue that the customers generate. In practice this is deeply flawed, as it equates volume with value, and tends to drive further margin reductions in the belief that these are ‘justified’ through the resultant revenue increases.

Margin information is vital; and this necessitates a view of the actual cost to serve – the attributable cost of doing business with the customer, including the acquisition cost, both in marketing and sales, handling, processing, and ongoing servicing.

This entails an element of activity based costing; but it is vital that this exercise is kept at a relatively high level. Costing exercises can descend into depths of analytical minutiae that are utterly unnecessary; something that is adequately robust is all that you need in order to mobilise a profitability-based strategy: there is little value in arguing indefinitely over cost allocations when the company continues to treat all customers – profitable and unprofitable – alike.

The work also involves identifying the value of the lost customers: calculating the profitability of these customers, through a combination of their billings, the attributable costs, and the length of their relationship with the company.

Identifying the “pareto” skew

One of the ‘truisms’ of customer bases that is demonstrably true, is that the top 20% of the customer base for any organisation where multiple purchases are possible will generate c. 80% of the profit.

This can produce an enormous gearing effect for sales and marketing expense – but only if these 20% are correctly identified, and the information acted upon.

Once the customers are ranked in terms of their profitability –or potential profitability, which is often an area where a knowledgeable salesforce can add substantially to ‘head office’ decision-making – the company can address several issues that offer significant advantage to its efficiency and its bottom-line profit.

Identifying the comparative profitability of recently acquired customers, compared with recently-lost customers, can indicate that sales efforts need redirecting; knowing which customers are generating the greatest profit can help steer ongoing marketing expense into acquiring more customers like these, and less of those who are only marginally profitable, or who are actually generating a loss; servicing and processing costs – and the systems requirements underpinning the customer processing activities – can similarly be geared towards attracting and keeping only the most profitable customers, rather than being diluted by attempting to ‘raise the bar’ for all.