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San Jose Business Journal
Not All Customers Are Equal - Understanding Customer Profitability
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San Jose Business Journal
Stage 4 Solutions and Niti Agrawal were featured in the San Jose Business Journal on September 29, 2006.
The focus of the article is on Stage 4 Solutions’ success as an product marketing consulting firm, and
on the tremendous growth that has been achieved this year. Stage 4 Solutions has experienced double digit
growth year after year since it’s inception in 2001. Niti attributes this success to the company culture of
communication and follow through, the strong marketing expertise of her consultants, and a commitment to client success.
The company has achieved 100% client referenceability and continues to grow.
The article also discusses Stage 4 Solutions’ recently released research study on outsourced marketing.
To read the article, "Consultant Spots", rides marketing’s latest wave, please click here.
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Not All Customers Are Equal - Understanding Customer Profitability
Understanding what it costs to serve your customers, and which customers are more or
less costly to serve is a strategic component to achieving profitability. While all companies know their
bottom line profitability and their net profit by month, quarter and year, they probably do not understand
profitability by customer - especially in the area of services. Service costs are particularly difficult
to quantify and tie to specific services delivered, because there are more shared costs among customers,
and employee costs are typically not tracked against services delivered and by customer.
Service businesses don’t truly understand which customers cost more to serve than others, and which customers
use fewer resources, so in fact are more profitable. The type of financial information necessary to determine
the cost to service a customer is typically not available through financial accounting systems or management
tools, and often proves to be a significant challenge to pull together. However, this detailed and involved
process may possibly be the most critical determination to business success. Without this knowledge, service
businesses run as if blindfolded.
If companies understood profitability by customer and customer segment, they could manage their businesses far
more effectively, and develop strategies to:
- Target the "right" most profitable customers segments
- Price services to yield consistent gross margins across customers
- Discount sales to specific customers
- Design promotional bundles and service bundles
Service organizations, in short, could be a lot smarter about how to run their entire service business and plan
for the future. For a recent client, Stage 4 Solutions, developed a customer profitability analysis and scenario
planning model, which provided great insight into customer profitability and resource usage. In developing the
customer profitability model, we defined and analyzed several key factors:
Revenue by Customer:
- Sales revenue by customer is typically available through a sales force system or an order management system
Services Delivered:
- All services that are delivered to customers need to be categorized as discrete activities. For each
identified service, a "cost driver" must be associated. A cost driver is a transaction that can be used
to "count" the number of services transactions provided (or the volume of services provided).
Total Cost by Service:
- All salary and non-salary costs need to be divided into the service types identified.
Overhead Costs:
- Overhead costs may or may not be allocated back to each customer. There are several different
overhead allocation methodologies to employ if that decision is made. Often, the analysis is best done
at customer contribution margin; which is customer revenue less the costs to deliver services associated
with that revenue.
Defining and analyzing each of these facets requires a great deal of thought and cross-functional buy-in
to develop a meaningful analysis.
For many organizations, a customer profitability analysis is a one-time or, at best periodic event.
The sporadic nature of such analysis is because few, if any, traditional ERP or other accounting solutions
are developed to support such categorizations of costs, time, service types and cost drivers. However,
some innovative solutions in this area are being developed by technology start-ups. For lasting value,
such solutions must be adopted so that customer profitability becomes an integral part of a service business’
decision making and strategy development processes.
If you are interested in learning more about the cost to serve methodology or would like help in developing
a customer profitability model for your business, please contact Stage 4 Solutions at (408) 868-9739 -
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