Chapter 06 Atkinson, Kaplan, Matsumura & Young Management Accounting 6th ed Powerpoint

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Measuring and ManagingMeasuring and ManagingMeasuring and ManagingMeasuring and Managing
Customer RelationshipsCustomer RelationshipsCustomer RelationshipsCustomer Relationships
Chapter 6Chapter 6

2. MSDA !MSDA !pensepensessMSDA !MSDA !pensepensess

Marketing, selling, distribution, and administrativeMarketing, selling, distribution, and administrative
expensesexpenses

Most are independent of the volume and mix ofMost are independent of the volume and mix of
products and cannot be t products and cannot be traced through causalraced through causal
relationships to productsrelationships to products
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MSDA !pensesMSDA !penses

If managers only use financial performance
metrics, they may take actions that improve short-
term financial performance but damage long-term
customer relationships

Both financial and nonfinancial metrics are needed
to manage performance with customers

o balance the pressure to meet and exceed
customer expectations, companies should also
measure the cost to serve each customer and the
profits generated

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Customer Pro"ita#ilit$Customer Pro"ita#ilit$

!igh Cost-to-"erve Customers
# $rder custom products
# "mall order %uantities
# &npredictable order arrivals
# Customi'ed delivery
# Change delivery re%uirements
# Manual processing( high order error rates
# )arge amounts of pre-sales support
# )arge amounts of post-sales support
# *ay slowly

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Customer Pro"ita#ilit$Customer Pro"ita#ilit$

)ow Cost-to-"erve Customers
# $rder standard products
# !igh order %uantities
# *redictable order arrivals
# "tandard delivery
# +o changes in delivery re%uirements
# lectronic processing with 'ero defects
# )ittle to no pre-sales support
# +o post-sales support
# *ay on time

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Customer Pro"ita#ilit$Customer Pro"ita#ilit$

ilfredo *areto, Italian economist, developed the
./#0/ rule after noting that ./1 of a region2s land
was owned by 0/1 of the population

3hen companies rank products, they generally
find that the top-selling 0/1 of products generate
./1 of the sales

he ./#0/ rule applies well to sales revenues but
it doesn2t apply to profits

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A%C Customer Anal$sis A%C Customer Anal$sis

he output from an 4BC customer analysis is
often portrayed as a whale curve
# 4 plot of cumulative profitability versus the number of customers
# Customers are ranked on the hori'ontal axis from most profitable
to least profitable

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Customer Pro"ita#ilit$Customer Pro"ita#ilit$

4 whale curve for cumulative profitability
typically reveals5
# he most profitable 0/1 of customers generate
about ./1 of total profits
# he middle 6/1 of customers break even
# he least profitable 0/1 of customers lose ./1 of
total profits, leaving the company with //1 of
total profits

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Managing CustomerManaging Customer
Pro"ita#ilit$Pro"ita#ilit$

!igh-profit customers appear in the left section of
the profitability whale curve
# hese customers should be protected
# hey could be vulnerable to competitive inroads
# Managers should be prepared to offer discounts,
incentives, and special services to retain the loyalty
of these valuable customers if a competitor
threatens

10. Customer Costs in ServiceCustomer Costs in Service
CompaniesCompanies

"ervice companies must focus on customer costs
and profitability because the variation in demand
for organi'ational resources is much more
customer driven than in manufacturing companies

Customer behavior determines the %uantity of
demands for organi'ational resources that produce
and deliver the service to customers

Measuring revenues and costs at the customer
level provides the company with far more relevant
and useful information than at the product level
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&ncreasing Customer&ncreasing Customer
Pro"ita#ilit$Pro"ita#ilit$

Companies have many options to increase
customer profitability
# *rocess improvements
# 7eploy menu-based pricing to allow customers to
select the features and services they are willing to
pay for
# nhance the customer relationship to improve
margins and lower cost to serve
# &se more discipline in granting discounts and
allowances

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Process &mprovementsProcess &mprovements

Managers should analy'e internal operations to
see where they can improve processes

8or example, if a company receives a large
number of small orders, the company could5
# "trive to reduce costs of setup and order handling
# ncourage customers to place orders electronically

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Activit$'%ased Pricing Activit$'%ased Pricing

*ricing is the most powerful tool a company can
use to transform unprofitable customers into
profitable ones

4ctivity-based pricing establishes a base price for
producing and delivering a standard %uantity for
each standard product

"pecial services may be priced 9ust to cover costs
or also to earn a margin

4ctivity-based pricing prices orders, not products

14. Managing RelationshipsManaging Relationships

Companies can transform unprofitable customers
into profitable ones by managing customer
relationships
# *ersuade them to use a greater scope of products
and services
# stablish minimum order si'es
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Pricing (ater"allPricing (ater"all

Before giving a customer a price increase, the
company should examine the many ways it has
already reduced the effective price the customer
actually pays

"mall concessions offered by different
organi'ational units may accumulate into large
revenue leaks

*ricing 3aterfall charts list the multiple revenue
leaks from the list price caused by special
allowances and discounts granted to the customer

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Salesperson &ncentivesSalesperson &ncentives

4 typical salesperson2s compensation plan sets
minimum %uotas and provides incentive
commissions based on sales revenue

here may be special rewards such as vacation
trips for achieving sales revenues above a stretch
goal

hese incentive plans sometimes fail to take into
consideration decreases in profitability due to
special discount allowances and arrangements
negotiated to close the deal

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)i"e'C$cle Pro"ita#ilit$)i"e'C$cle Pro"ita#ilit$

Companies invest considerable resources to attract
new customers, which may turn out to be
unprofitable

Customer )ifetime alue :C); calculates the
customer2s profit each year after all costs and the
discounted cash flows are compared to the initial
ac%uisition costs to obtain the total value of the
customer

4 company using C) is tracking how much it
spent to ac%uire each customer and the profits
earned

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)i"e C$cle Pro"ita#ilit$)i"e C$cle Pro"ita#ilit$

he critical parameters for calculating )ifetime
Customer alue are5
# Initial ac%uisition cost
# *rofits or losses earned each year
# 4dditional costs to retain the customer
# 7uration of the relationship

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Measuring CustomerMeasuring Customer
Per"ormance *ithPer"ormance *ith
+on"inancial Metrics+on"inancial Metrics

8ocusing on only financial metrics may cause a
company to take actions that could risk the
company2s long-term relationship with a customer

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Customer Satis"actionCustomer Satis"action

Most companies attempt to measure customer
satisfaction by using surveys

ypical survey %uestions address5
# *roduct %uality
# ase of ordering
# <esponsiveness of company personnel
# Customer complaint services

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Customer )o$alt$Customer )o$alt$

)oyal customers are valuable for several reasons5
# =reater likelihood to repurchase
# *ersuade others to become new customers
# )ess likely to defect for price discounts from
competitors
# 3illing to pay a price premium to retain a
relationship with a key supplier
# 3illing to work with the supplier to improve
performance and develop new products

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+et Promoter Score+et Promoter Score

"ome researchers have found that there is a low
correlation between customer satisfaction and
future revenue growth

Customers often remain with their current supplier
because of lack of inertia, high switching costs, or
lack of an alternative supplier

4 customer2s willingness to recommend a
company is strongly correlated to future sales
growth

Customer surveys have been expanded to ask if a
customer is willing to recommend the company

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