Measuring and Managing Customer Profitability the ‘BSC’ way

The concept of ‘Customer Profitability’ emerges when the idea of ‘profit’ is applied to ‘customer relationship’

It is known that Companies spend significant amounts in ‘building and sustaining’ useful customer relationships. This is done to get the returns in financial terms to keep the ‘show going on’.

However, there has to be a balance in the ‘efforts put in’ and ‘results expected’. This is because either ‘trying to increase revenue without spending appropriately’ or ‘spending un-wisely without knowing the effect on revenues’ would not be a wise decision, in any way.

This makes it necessary to keep a track on both of these parameters. One of the manner in which this can be done is by knowing the profitability of customer- base, on per customer basis. Organizations step into this area of ‘Customer Profitability’ on sensing a need to distinguish the ‘profitable sections of customers’ from the ‘non- profitable or the less- profitable ones’. The underlying thought behind this concept is that the organizations should consider customers as ‘long-term assets’, in which the marketing department should invest to draw the returns in future.

On the whole, the computing of customer profitability acts as a ‘sieve’ that enables the filtering of ‘profitable sections of customer base’ from the total customer base pool. Such screening makes possible the efforts directed at the customer base to be more concentrated and focused. Also, it paves the way for carrying out ‘analytical studies’ to construct more substantial marketing plans for the company. These can help the organization in shifting the customers from ‘non-profitable’ category to the ‘profitable’ lot. Further, the reasons for existence of customer sections that are ‘less profitable’ or ‘completely non-profitable’ can be dug.

Getting over successfully with this exercise lays bare the opportunities that were earlier hidden in the huge client base. For instance, it has been discovered that sometimes a particular customer group is only making the company ‘pay’ to maintain them, without generating any revenue for it. Such groups are nothing more than a ‘burden’ for the organization. It is better to stop serving them rather than dragging in the hope of making them profitable.

Consequently, marketing plans that are more focused and stand greater chances of being successful can be framed and implemented. However, due to the ‘extremely detailed nature’ of this study, several hurdles lie in the way. One is required to pay the deserving attention to each of these prior to jumping into it.

The foremost challenge in this subject is the dealing with mountain of values and numbers. Mind- boggling statistical and calculative work that is involved in it demands a good command over ‘handling of numbers’. Assigning revenues and costs to clients is ‘understandably’ a big deal owing to the expanded customer base owned by companies.

Moreover, with the rise in the number of businesses that are going ‘online’, the spread of customers has become even greater; thereby adding to the complexity of the job.The actual process of evaluating customer profitability involves preparation of reports, on per customer basis to assess the profitability. This can be an extremely difficult job, when the customer base is significantly huge. The data related to cost and revenue is stored in a database. Further, the proportion of costs and revenues are allotted to individual customers to know the profitability, on the basis of some pre-decided allocating rules.

One can alleviate the troubles by using a balanced approach, like that of BSC (Balanced Scorecard). The indicators that are put in it can serve the purpose of measuring the process, accurately. The perspectives that can prove useful are the ones that relate to- Average Lifetime Value, Customer Retention Potential, Revenue Collection and Process Performance.

Average Lifetime value can be calculated using indicators like ‘discount rate’, ‘retention cost’, ‘profit margin’ and ‘period’. Customer retention potential can be had with metrics such as ‘number of switch barriers’, ‘retention rate’, ‘customer satisfaction’ and ‘offers attractiveness index’. Revenue collection can be measured depending on parameters like ‘autonomous revenue surge’, ‘cross-selling climbing index’, ‘up-selling revenue rise’ and ‘reference value’. Finally, performance of the process can be obtained with ‘rise in customer segmentation tuning’, ‘customer margins rise’, ‘customer lifetime value’ and ‘scaling customer impact’. Following this ‘quantified’ path can get the organization the revenue they ‘desire’ and ‘deserve’ from the customer base.