Accounting for Managers: Interpreting Accounting Information for Decision-Making, Canadian Edition

READING 4

The Strategic Value of Customer Profitability Analysis

Erik M. van Raaij

Introduction

Aided by decreasing costs of computing power and increasingly sophisticated methods of customer data collection, the customer database has become a core asset for organisations of all types and sizes. It is typically used to record and store customer details, such as name and address, and behavioural data, such as purchases made and responses to marketing campaigns. On a tactical level, these data can be used to improve services (for instance, a hotel can offer a personalised service on the basis of the data it has on past customer preferences), or to improve marketing effectiveness (such as when a charity that sends out selective appeals to its most generous donors). In this paper, our focus is on uncovering strategic information—information that has value for top managers—that is hidden within the customer database.

One approach to uncovering such strategic information is performing a customer profitability analysis (CPA). The basics of such an analysis are discussed in the next section. A CPA results in two types of insights: the degree of profitability for each individual customer, and the distribution of profitability among customers within the customer base. These two types of data enable novel analyses related to:

1. costs and revenues;
2. risk; and
3. strategic positioning.

Each of these three areas is discussed in a separate section of this paper. CPA has its limitations, as it is ...