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Khairunnisa Rahinaningtyas Strategic Managerial Accounting

16/397035/EK/20991 Chapter 6
Customer Profitability Analysis

This chapter focuses on providing nonfinancial metrics that is introduced as an important key
performance indicator in Balanced Scorecard framework. The Balanced Scorecard is introduced
previously in Chapter 2 of this book, and thus this chapter explains further in detail from customer
perspective. Although customer are certainly valuable, the writer remind readers to not be too
obsessed by it, therefore disregard other metrics such as costs, and other financial metrics that we
already know is a more reliable variables.
In manufacturing companies, customer profitability might not be as critical as in service
companies. Identifying and classifying customers by the expenses incurred targeted for them
(marketing, selling, distribution and administration costs) is the first step to make more accurate
strategies, and if possible, target a more suitable customers. In service companies, profitability and the
variation in demand is mostly customer driven. Customer behavior determines the quantity of
demands for organizational resources.
To increase customer profitability, companies may:
● Improve the processes used to produce, sell, deliver, and service the customer.
● Deploy menu-based pricing to allow the customer to select the features and services it wishes
to receive and pay for.
● Enhance the customer relationship to improve margins and lower the cost to serve that
● Use more discipline in granting discounts and allowances.
In identifying profitable customers, or probably avoiding potential unprofitable customers,
salespeople incentives is condemning. Companies base salespeople’s compensation and rewards on
revenues because it is a simple measure, and generally easy to calculate. Salespeople can still accept
breakeven or loss orders in order to penetrate a new account or to keep an overall highly profitable
and loyal customer happy.
Companies usually spend a great amount of money in marketing campaigns to attract and
acquire new groups of customers. As previously said before, identifying profitable customers is
critical because targeting the wrong customers would result in tremendous loss in the future. In
addition to recognizing cross-sectional variation of demands by customers, companies must also
forecast the longitudinal variation of customers over time to calculate their total life-cycle profitability
Nonfinancial metrics that focuses on customers can be realized by such characteristics such as
customer satisfaction, customer loyalty, and net promoter score. These examples are used by
companies with wide range of culture, and conditions, and it requires long consideration of internal
and external factors.