You hang up the phone and realise that this is the third time
this week that this client has called for investment advice but
hasn't invested anything. Back at your desk, you check your
inbox and see that another client, whom you haven't spoken to
in a while, has just placed an order—the fifth this week!
With this order, you've reached your target for the month. But
two months later, this trigger-happy client informs you that she
wishes to terminate her account because the fees are too high.
So what should you have done? Should you have reduced fees for
the more profitable client and spent more time on her, while
increasing the fees for your other, more reluctant, client?
Happens every day
A recent KPMG and ACCA study shows that while most companies
calculate their overall product profitability, only 45% globally
know how profitable their customers are.
Furthermore, our experience has shown that the top 20% of your
customers create approximately 200-300% of the annual profit, while
the remaining 80% destroy the profit by approximately 100-200%.
Customer profitability can provide information that supports
implementation of strategic and tactical changes within an
organisation. Intense competition and pressure in many industries
still drive companies to seek deeper cost savings which will
require more innovative strategies.
What might be wrong with existing profitability
They could be perfectly right! However, experience has shown
that even traditional cost allocation models are often...
not up-to-date and thus no longer reflective of reality
not supported by the right tools and thus can't be simply
subject to a long and difficult data collection process
As you know, being able to choose innovative strategies and to
take informed decisions to achieve sustainable growth requires
strong and stable baseline financial information. This makes profit
calculation very important.
What are the benefits of calculating customer
By doing such calculations organisations can efficiently and
effectively analyse business costs, income, and profitability at
multiple levels to help make better-informed business
But they can go further, too.
We are living in
the age of the customer, and the currency of our age is
customer experience. At no prior time has the customer had such an
influence on how a company does business. Customers desire
consistent and high-value experiences, transparent pricing, and
customised offerings, and may go elsewhere if they don't
receive these things. We believe success belongs to those companies
who master the economics of customer experience, by which they will
find the optimal balance between customer satisfaction and
Organisations will have to move away from snapshot financials
and move towards trending and prediction on a more frequent or
event-driven basis. Putting data and metrics in context and
correlation with one another will be synonymous with finding the
winning formula that works for organisations and their customers
The figure below illustrates how organisations, in order to
combine customer experience with customer profitability, should
take both a management view as well as a customer service view:
Furthermore, by implementing customer profitability
calculations, the company can achieve significant benefits in a
range of areas, such as:
sales/marketing: enhanced pricing
production: improvements in value chain and efficiency
insight: enhanced efficiency
management: profitability, customer investments, direction of
overall: increase in company value
HR: creation of a profitability culture
competitive environment: initiation of correct customer
What are the challenges of a customer profitability model?
Identifying the most profitable customers from the current
customer base is not an easy exercise, but what's even harder
is identifying who will be the most profitable customers
in the future. The challenge lies in measuring the allocation of
costs to customers. While it is usually clear what revenue each
customer generated, it is often not clear at all what costs the
firm incurred serving each customer.
Like other profit measures, customer profitability is
historical. It is a financial summary of what happened in a
previous period. The forward-looking measure of the value to be
derived by serving a customer is called customer lifetime value.
However, unprofitable customers can have high customer lifetime
values (and vice versa).
In order to further analyse the profitability of your customer
(whether you have a customer profitability model in place or not),
a more innovative methodology has been developed. It works by
analysing the customer profitability by product and sales channel.
Read more on Multidimensional Profitability in our next blog.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
25 Apr 2017, Business Breakfast, Luxembourg, Luxembourg
KPMG Luxembourg is pleased to invite you to a networking breakfast for Family Offices and Private Bankers. On this occasion, we will present the latest developments around hidden profit distributions to non-shareholders.
Here in Luxembourg, LPEA are holding an event which will offer new initiatives by bringing General Partners (GPs) and Limited Partners (LPs) together to examine and speak on the industry from the “360” perspective, leaving no stone unturned. We are a sponsor of the event, as well as having a speaker present. David Capocci, Partner and Head of Alternative Investments will be offering his own insight on the industry nowadays.
The conference will centre on the new tax normal, full transparency, and specifically the role of private bankers in this new age. Originally perceived as a threat to existing business models, full tax transparency may actually hold new opportunities for private bankers.
In February 2017 the Cyprus Ministry of Finance issued the latest statistics showing positive signs of growth, with the 4th quarter of 2016 recording positive growth of 2.9% (in seasonally adjusted terms)...
The Guide has been prepared for the assistance of those interested in doing business in Malta.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).