Customer

profitability analysis
PRESENT BY: (cpa)
ARISYA ABD WAHID 2017193757

IZYAN MUAAD 2017129399

NADZIRAH ASYIQIN MOHD NADZRI 2017979803

NURUL NADIAH MOHD NAJJIB 2017779347

AIMAN NAZMI BIN AZRI 2017393039

 definition
A tool from managerial accounting that shifts the focus from product line
profitability to individual customer profitability. It is a method of looking at
the various activities and expenses incurred in servicing a particular
customer. In other words, it focuses on analyzing profit per customer rather
than profit per product
 Importance of
●
cpa
CPA recognized that each customer is
different
● Each dollar of revenue or cost generated by
the customer does not contribute equally to a
company’s profitability
● Therefore, it is important to analyse which
customer contributes the higher profit to the
company
example
Solar panel
company
Serves two types of customers: 1) Individuals
2) SMEs

In providing the service, the solar panel company is required to provide

consulting and service visits, as well as process sale orders. Individuals
require only one site visit before placing an order, while SMEs require
more frequent visits, as they are based in multiple locations and are
provided with after-sale service as part of the bulk purchase. From here, we
can see that SMEs will require more costs to be incurred as compared to
individual customers.
Company strategic
decisions
● Shift focus towards having more
Individual
customers from the more profitable
smes
individual segment s
● Look for cost reduction approaches
for its SME segment - redesign its
Annual sales ($) 1000 3000
purchasing process in order to
reduce the frequency of visits or Visits per year -150 -1500
orders
Orders per year -100 -800
● Charge its customers for additional
service visits to shift the weight of Customer
750 700
the cost from the company to the profitability
customer Customer profitability: individual segment > SMEs
segment
 THE CONCEPT OF
CPA Segmenting
customer base
To determine or allocate the cost
and revenue in each customer
segment
Cpa is
Identify the complemented by
ABC provide accurate production
abc
customer cost of the product & services to
each customer segment.
● Profitable
● Non-profitable
● Less-profitable

https://www.cimaglobal.com/Documents/ImportedDocuments/cid_tg_customer_profitability_analysis_jan09.pdf.pdf
Key steps in cpa
process
Step 1 Step 3 Step 5
Customer Use ABC to Develop Strategies to Maximise Profit &
Segmentation Determine Cost Reduce/ Eliminate Less Profitable/
Attributable to Unprofitable Customer Segment

0
Each Segment

0 0 0 0 0
1 2 3 4 5 6
Step 2 Step 4 Step 6
Revenue Analyse the Profitable vs Review the Impact of The
Atrributabe to The Less Profitable/ New Strategies on The
Each Segment Unprofitable Customer Performance of Customer
Segment Segments
 STEP 1 : CUSTOMER
sEGMENTATION
Two basic approaches to customer segmentation:

• Demographic – geographic area, customer age, income

level, sex

• Psychographic – customers value, attitudes and

interests
 STEP 2 : revenue attributable
to each segment
• The annual revenue is calculated per segment which is based on the
products or services offered by the company.

• Adjustments to the price paid by the customer for a product/services

must be included to determine the true amount of revenue generated
by each customer & the aggregated amount calculated for the
customer segment.
 STEP 3 : use activity-based costing (abc) to
determine the cost attributable to each
segment
● The annual cost is calculated per segment – ● ABC is an effective way to assign both types of
involve both directly attributable costs to customers.
product/service cost and customer costs
(allocation of overheads, marketing, sales &
distribution costs).
● It is these customer costs which are often hidden
such as quality control & inspection costs, etc.
STEP 4 : analyse the profitable vs the less
profitable/ unprofitable customer segments
● Profitable customer segments – annual revenues exceed annual costs
● A profitability of customer segments is likely to vary from year to year – more accurate analysis could involve
calculating profitability over the lifetime of each customer segment
STEP 5 : develop strategies to maximise profit from
profitable customers & reduce or eliminate less
profitable/ non-profitable
• customers
Involves detailed planning around the development of long term customer
relationship for increased revenues, hence profitability such as customer retention
and loyalty programmes.
• 2 actions are used to address the least or non-profitable customer groups:
 elimination – ceasing to supply these customers. This can be done by changing the
product/service so that it is no longer suitable or raising prices.
 Re-engineering – turning the least or non-profitable customer groups into profitable
ones by either increasing revenue or decreasing costs attributable to these groups or
both.
STEP 6 : review the impact of the new strategies
on the performance of the customer segments
The implementation of any new strategy
(changes in pricing, cost reduction or
customer services) should be reviewed
after an appropriate period to determine
the impact on customer profitability
 Improving customer
profitability
Develop deeper understanding of
customers
Know cost-to-serve
component
-Engage and respond to customer service - Direct focus and resources.
requests.
- Analyze the profitability on a
-Able to focus on one-to-one or personalized transaction-by-transaction basis .
customer marketing

develop existing customer Transform company’s

relationship management attitude towards its
system
-
customers
- CPA goals align with the way service
Give insight into which are the more delivered to customers.
profitable customer groups
- Transform less profitable customers into
- Ex. Microsoft Dynamics 365. improved profitable one.
Illustration to calculate profitability

The revenues and directly traceable costs for each customer type:

Individual Corporate University

Total
Customers Customers Customers
(rm)
(rm) (rm) (rm)
Revenue 600,000 750,000 700,000 2,050,000
Direct Costs 450,000 562,500 525,000 1,537,500
Activity levels for each customer type:

Individual Corporate University

Total
Customers Customers Customers
No. of orders 12,000 15,000 13,000 40,000
No of product 160 110 130 400
designs
No of complaints 160 150 190 500
Indirect costs:

Individual Corporate University

Cost pool
Customers Customers Customers
(rm)
(rm) (rm) (rm)
Ordering costs 80,000 24,000 30,000 26,000
product designs 20,000 8,000 5,500 6,500
cost
Cust service cost 30,000 9,600 9,000 11,400
Illustration to calculate profitability
Individual Corporate University
Total
Customers Customers Customers
(rm)
(rm) (rm) (rm)
Revenue 600,000 750,000 700,000 2,050,000
(-) Direct Costs (450,000) (562,500) (525,000) (1,537,500)
(-) Ordering costs (80,000) (24,000) (30,000) (26,000)
(-) product designs (20,000) (8,000) (5,500) (6,500)
cost
(-) Cust service cost (30,000) (9,600) (9,000) (11,400)
= Operating profit 108,000 143,000 131,100 382,500
OPERATING 18.07% 19.07% 18.73% 18.66%
MARGIN
Customer profitability analysis:
advantages disadvantages
Focus to improve
profitability or elminate Wrong customer data
non-profitable customer collection.
through customer
ABC implementation is
differentiation.
Building customer expensive, difficult &
relationship. extremely time-consuming
to be performed.
Improve strategic Product mix is ignored
decision making. because CPA focus more on
customer mix.
 TELEKOM
MALAYSIA
• Identify 2 profitable customer:
1. Malaysian households and
individuals
2. Small & Medium Enterprise

Households & Individuals SME

Telephone services and WiFi Telephone services, broadband

(Streamyx and Unifi) data & business tools
More programs on broadband Expand Hospitality Entertainment
services Solution (HOTES) – 8 Free
Channels and 61 Premium
Channels
 FORD MOTOR
COMPANY
Ford Motor Company recently estimated the percentage of the firm’s
customers buying a Ford as the next car. Ford’s stated goal was to
increase customer retention from 60% to 80% as the company was
convinced that each additional percentage point of customer retention was
worth $100 million in profits.
 CONCLUSION
Customer profitability analysis deal with revenue and
cost spent by the customer. Those managers who applied
this method are forward-looking analyst by taking count
retrospective analysis of customer profitability as it is
valuable and essential. They calculated the net present
value of the future revenue and also the cost associated
to the customer within their lives
Thank you!