Customer profitability is the process of determining whether the resources spent on acquiring and maintaining a customer relationship are greater or less than the benefits generated. The most common model involves evaluating customer acquisition cost and indirect benefits such as word of mouth. Maintaining customer profitability requires a strong customer service ethic.
Customer profitability is a process of determining whether the amount of resources expended to acquire and maintain a relationship with a particular customer is greater or less than the benefits generated by that relationship. In the strictest sense, the profitability of the relationship is based on the difference between the costs of time and supplies that are consumed by the relationship and the revenue generated from sales made to that customer. Other formulas also allow for indirect benefits such as word of mouth provided by the customer and the extent to which that customer’s recommendations lead to additional customer acquisition.
The most common model for determining customer profitability involves evaluating what is known as customer acquisition cost. These are simply all costs associated with sales and customer service activities for that customer. Examples include both direct and indirect costs, such as the wages and salaries of customer-facing staff, the average cost of promotional materials sent to the customer, and any discounts extended as an incentive to open an account.
If the costs associated with securing and maintaining an ongoing customer relationship are fully offset by the revenue generated from sales to that customer, the relationship is considered to be at breakeven. Here, the indirect benefits of the relationship can add a certain degree of customer profitability. If the customer has recommended the business to several acquaintances who subsequently become customers and generate revenue for the business, that intangible benefit may be enough to continue the relationship even if no profitability is directly achieved.
When the revenue generated exceeds the cost of securing and maintaining a customer relationship, customer profitability is more easily measured. Ideally, such profitability includes both tangible and intangible benefits, where the revenue stream generated is far greater than the account management costs and the degree of customer loyalty is such that the customer routinely promotes the products offered by the company. As many businesses understand, maintaining customer profitability means having a strong customer service ethic which involves handling customer complaints quickly and effectively, as well as always listening to the customer’s voice, regardless of the nature of the question, comment or of concern. Failure to handle customer complaints or in any way communicate to the customer that they are not worth the money, opens the door for competitors to step in and win that customer over, possibly never returning
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