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Calculating and Reporting Customer Profitablility
American Productivity & Quality Center (APQC), April 2006, Pages: 131
Not all customers are created equal. More and more, leaders are viewing business as an investment portfolio of customers, some more valuable than others, with the level of investment delivered commensurate to the level of customer value. The profitability of the customer mix is becoming more important than profits of the individual products. This approach is a significant shift from traditional product, service, geography, territory, and function-based organizations. Executives are discovering the benefits of enhancing their customer investment portfolio by creating and executing competitive customer value propositions.
We're not everything to everybody as a community credit union.
We expect the relationship to be mutually beneficial.
—CIO, North Shore Credit Union
While many organizations see the potential value of calculating and reporting customer profitability, not all areas are equally problematic to the organization. Once an organization can identify their customer segments, then what? Typically, the organization will want to know which customers in the segment are profitable and which ones are not. Without understanding how different customers consume costs and resources, organizations cannot successfully calculate customer profitability.
The purpose of this report is to identify and share best practices for customer profitability models, cost allocation methodologies, communication of customer profitability information, and usage of customer profitability to make more effective business decisions. Analyzing the profitability of the customer portfolio and understanding each customer and customer segment is fundamental for the management of the business and is a critical part of being customer-centric.
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