The strategic value of customer profitability analysis

Abstract

PurposeThe aim of the paper is to show how intelligence emanating from customer profitability analysis (CPA) can help improve strategic marketing planning. Insights into the profitability of individual customers, as well as the distribution of profitability across the customer base, can lead to better decisions in the areas of managing costs and revenues, managing risks and strategic market positioning.Design/methodology/approachThe concept and process of CPA are first explained. The heart of the paper then discusses how the outcomes permit novel analyses related to costs and revenues, risk, and strategic positioning. Finally, the paper explains what is needed to make the shift from retrospective CPA to prospective CPA.FindingsCPA delivers two types of insights: the degree of profitability for each individual customer, and the distribution of profitability among customers within the customer base. Profitability data at the level of the individual customer support better decision making about service levels, marketing investments and pricing strategies. The profitability distribution curve yields information about the vulnerability of future cash flows from customers. Further, DPA data permit segmentation and targeting on the basis of profitability and the development of different value propositions for different profitability segments.Practical implicationsShareholder value is created through cash flows from customers. CPA uncovers where these cash flows are generated. Armed with customer profitability data, marketers can really develop and implement value‐driven differentiated customer service strategies.Originality/valueWhile quite a number of published papers have discussed the technicalities of calculating customer profitability, this paper adds to the literature an overview of how the outcomes of such calculations can help planners make better decisions, to increase the magnitude of cash flows from customers and/or reduce the volatility and vulnerability of such cash flows.