Cost Management

1. Managing Customer
Profitability
Chapter 6

2. Customer profitability
Applying ABC to customers or customer
groups
Customer is the “cost object”
What activities are performed to service customers?
Can the activities be managed?
What costs are related to serving individual
customers or groups?

3. Customer profitability
Activity Driver
Cost per
driver unit
Driver
units Cost
Sales calls # of sales calls 53$ 6 318$
Contract negotiations Negotiation hours 210 2 420
Order processing # of orders 450 11 4,950
Order picking # of line items 6 128 768
Shipping Pounds shipped 8 1,520 12,160
Customer training Training hours 150 6 900
Total support cost 19,516$
Post-sale customer support Support hours 90 4 360$
House Depot

4. Customer profitability
Financial considerations
Profit
Pareto principle (80/20 rule)
Which customers fall into which group?
A large market share is not always best
Return on sales
Profit (or loss) / sales

5. Cumulative profit
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Customer
Customers by profitability
($50,000)
($25,000)
$0
$25,000
$50,000
$75,000
$100,000
$125,000
$150,000
$175,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Customer
Profit
Customer profitability

6. Customer profitability
When to keep unprofitable customers
New customer
Possibility of converting them to a profitable one
Improve efficiency
Reduce activities
Menu-based pricing
Nonfinancial considerations
Opportunity to learn
Prestige
Entry into new market

7. Customer profitability
When to keep unprofitable customers
New customer
Possibility of converting them to a profitable one
Improve efficiency
Reduce activities
Menu-based pricing
Nonfinancial considerations
Opportunity to learn
Prestige
Entry into new market