Customer profitability beats product profitability

Not all customers are created equal. Not all customers are profitable. Not all customers are top priority. Yet all customers can be treated well, just differently—when treated according to their contribution to profit, potential for profit improvement, and strategic importance.

These profitability tradeoffs have been understood on the product/service side of the business for a long time, but only more recently have companies been proactive about customer profitability. Now new research suggests that understanding customer profitability is more important than product profitability for performance.

A study of top executives from the Fortune 500 companies plus members of the Council of Supply Chain Management Professionals examines the impact of using profit contribution information—rather than purely sales or cost information—on a firm’s performance. The researchers found that there is a stronger connection between customer profit contribution information and performance than between product information and performance in terms of Return on Assets, Return on Investment, Overall Competitive Position, Customer Satisfaction, and Sales.

As the authors of the study note, “Profit contribution information can provide an important segmentation tool for companies…It’s the starting point for making better decisions and charting long-term strategies for success. If you don’t know which customers and which products are contributing the most, you’re leaving dollars on the table. Underperforming products and customers represent missed opportunities. The resources and efforts needed to handle them should be shifted to other products and customers with greater potential for positively impacting the bottom line.”

Practical application: If you pay special attention to those customers who generate the most profit, they are more likely to generate even more. Maintaining these “platinum relationships” and adding a customer to this level every few years can help you achieve spectacular growth levels–but only if the existing relationships are in fact retained.

The categories on the “whale” curve below are then franchise customers, bread and butter customers, okay customers, and losing customers. Pay attention to the franchise customers.

topprioritycustomers

The study, conducted by Religence’s own Bob Sabath (an internationally recognized supply chain expert), Patricia Daugherty of The University of Oklahoma, Daniel Mattioda of the Air Force Institute of Technology, and Haozhe Chen of East Carolina University, is reported in their Supply Chain Management Review article “Who—and What—is Profitable?.”

 

Customer Experience Wisdom: All customers are not equal, but deserve to be treated well, just differently.

Questions: Do you segment by customer profitability?

Are you paying enough attention to your franchise customers?

Is it clear who they are in your organization?

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