Thursday, March 26, 2015

Five ways for you to fail - Using customer profitability to become customer-centric Part 2

Part 2 - Using customer profitability to become customer-centric
   Five ways for you to fail

[Editor's Note: This is Part 2 of a series on customer profitability. I hope you find it useful.  - dpm]
We hate to present things in negative terms. However, many companies try hard to be customer-centric, but their efforts fail to add value to the company. Frequently, they commit some - and sometimes all - of the following sins:

Do you insist that the differences in the profitability of your customers aren't important or aren't measurable with current systems? Do you deny that you have unprofitable customers? If you try to calculate customer profitability, do you exclude some operating or capital costs? Does every cost in your company get allocated to a customer?

Are you adding lots of new customers without knowing how much they cost to acquire or how long they're likely to stay? Most important, do you know about the economic profit (operating profit minus a capital charge) you can expect from each new customer?

Do you make decisions based on average customer profitability (profitability by segments or markets)? Are you aware of how much profit comes from the best 20% and the worst 20% of your customer? Are you unsure about which specific elements of customer behavior cause customers to fall into the top and bottom groups?

FAILURE TO ACT Do you fail to make specific managers fully accountable for acting on customer profitability? Is your strategic plan disconnected from the economic profitability of customers?

Have you stopped short of figuring out how much each customer segment contributes to your share price or overall company value? Have you told your board and your stakeholders how you're using your knowledge of customer profitability?

Focusing on customer profitability is key to becoming a truly customer-centric organization. Calculating net profitability by customer is the start. Sustainable improvement to company performance requires changes to strategy, structure, organization, culture, and measurements.
Improvement can start immediately! The good news is that many of our small and middle market business clients see measurable profit increase within the first three months of implementation.

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