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Customer Profitability Analysis: Maximize Profits for Manufacturers

Do you know which customers are most profitable?

Most manufacturers still rely solely on margin analysis to determine customer profitability and make wrong decisions because they did not properly account for the efficiencies of serving one customer versus another.

IDC Research shows that 20% of a company’s customers make up 150% of their profit, while the remaining 80% of the customers contribute minimal profits, break-even, or lose money. Think about that. Many customers actually eat away a company’s profits.

Most companies lack the capability to discern critical trends in customer behavior that can radically alter purchasing habits, service requirements, and long-term profitability. Part of the problem stems from the failure of many providers to invest in robust customer intelligence solutions that would enable them to generate holistic views of customer activity across all product and service offerings.

Customer Profitability

With the right technology, training and support, providers can distinguish between their most and least profitable customers in a multitude of complex, real-world scenarios. They can also determine which products and channels are driving financial performance, and which aren’t.

While the advantages and benefits of customer intelligence are generally well known, the ability to perceive and act upon shifts in customer profitability is less widely appreciated. Customer profitability intelligence generates detailed analysis across different product and service lines. Armed with this kind of intelligence, providers can accurately:

Understand the combinations of behavior, cost, and revenue that are actually driving profitability.
Assess the cost to acquire and retain customers and profitably deliver products and services to them.
Recognize which profitability bands have the best cross-sell and up-sell propensity.
Develop demographic profiles of profitable and unprofitable customers.

Many manufacturers have not yet developed the capabilities required to reliably track crucial measures of customer value. In a very real sense, they can’t tell their good customers from their bad customers.

For example, customers with a history of paying their bills a couple of days late every month are often lumped into the same category as deadbeats – even when they subscribe to multiple service offerings and are highly profitable over time.

Customer Value Optimization (CVO)

Customer value development strategies are dynamic, not static. They can and should be continually improved, tuned and optimized for maximum benefit.

Technology investments can unite existing capabilities into a cohesive CVO technology platform that encompasses:

Strategic analysis and optimization — Forecasting, life cycle analysis, program development and reporting.
Program optimization — Developing, executing, and managing customer management initiatives designed to minimize churn and increase revenue and profitability.
Optimization sciences — The ability to design, build and employ advanced analytical systems that provide predictive models, segmentation analysis, mathematical optimization, experimental design and inference testing required to evaluate specific customer management actions.
Touch point optimization — Synchronization and optimization of intentional customer interactions across direct marketing, contact centers, online and other touch points.

An Iterative Process

CVO offers service providers the ability to identify opportunities, optimize practical customer management actions, and swiftly and cost-effectively feed results back into continuous improvements.

With CVO technology and competencies in place, the organization can systematically and continually:

Align customer management actions with business strategy, objectives and forecasts.
Identify the needs of specific customer segments, based on a unified view of the customer across the organization.
Design the most profitable opportunities to address those pains or needs, with full consideration of programs in other areas of the organization.
Implement effective campaigns or programs, leveraging resources from multiple departments for a cohesive approach.

In addition to continuously refining processes to increase customer value and boost profitability, CVO generates answers to complex, critical questions such as:

Which of our new products are fully aligned with our current business growth strategies, and which are not?
Do our loyalty incentives create customer value, or destroy it?
Which new programs will create short-term spikes in sales, but degrade long-term sales performance?
Are we wasting precious resources to win back or maintain unprofitable customers?

Summary and Conclusion

The challenge for managers at manufacturing companies is to generate profits from customer investments over an extended period of time. In the past, they counted on margin analysis of the product as the means for determining profitability, while ignoring the other costs required to service and maintain each customer. Today companies must look at all activities and the associated costs that are needed to service each customer.

Sustainable competitive advantage can only be achieved through the ability to consistently attract and retain profitable customers. Building customer profiles and then using this information to make smarter decisions at every customer touch point is the only way to minimize churn while maximizing profits. It is also the only way to make the right offers, at the right time, through the right channel.

Addressing customer satisfaction, retention and profitability is not a one-time activity. Nor can it be the responsibility of a single department. It is a cross-functional discipline that must become a way of doing business. What worked yesterday may not work tomorrow, so the organization must continually strive to learn all there is to know about its customers and then adapt to meet their needs.

SERVICES

OPERATIONAL EXCELLENCE

INFORMATION EXCELLENCE

INNOVATION EXCELLENCE

Customer Success