Customer profitability is the process of determining whether the resources spent on a customer are more or less than the benefits generated. The most common model involves assessing customer acquisition costs, and maintaining customer profitability requires a strong customer service ethic.
Customer profitability is a process for determining whether the amount of resources spent to acquire and maintain a relationship with a given customer is more or less than the benefits generated by that relationship. In the strictest sense, relationship profitability is based on the difference between the costs of time and supplies consumed by the relationship and the revenues generated by sales made to that customer. Other formulas also allow for indirect benefits such as the word of mouth the customer provides and the extent to which that customer’s recommendations lead to the acquisition of additional customers.
The most common model for determining a customer’s level of profitability involves assessing what is known as the customer acquisition cost. This is simply all of the costs associated with sales and customer service efforts directed at that customer. Examples include direct and indirect costs such as wages and salaries for employees who interact with the customer, the average cost of promotional materials sent to the customer, and any discounts given as incentives to open an account.
If the costs involved in protecting and maintaining an ongoing customer relationship are completely offset by the revenues generated by sales to that customer, the relationship is considered to be at a break-even point. Here, the indirect benefits of the relationship can add some degree of profitability to the customer. If the customer has recommended the business to several acquaintances who later become customers and generate revenue for the company, this intangible benefit may be enough to continue the relationship, even with little or no profitability obtained directly.
When the revenue generated exceeds the cost of securing and maintaining a customer relationship, customer profitability is more easily measured. Ideally, this profitability includes both tangible and intangible benefits, where the revenue stream generated is far above the account maintenance costs and the degree of customer loyalty is such that the customer routinely promotes the products offered by the company. As many companies understand, maintaining customer profitability means having a strong customer service ethic that involves handling complaints quickly and effectively and always listening to the voice of the customer, regardless of the nature of the inquiry, comment or concern. Failure to handle customer complaints or convey to the customer that he or she is not worth the effort opens the door for competitors to step in and win that customer, possibly never to return.
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