Use tools such as market research, user data, and poll data to explore why certain customers generate more profit than others.Ī data-driven approach gives clear insight into things like product returns, customer service contacts and marketing spend. Your business might already have clearly defined customer segments based on geographic location or other physical attributes, but this type of analysis lets you go deeper. In addition to defining customer costs, the next step is segmentation. Using the customer profitability formula is just one step in performing a profitability analysis. How to perform a customer profitability analysis With a profitability analysis, you’ll have a better understanding of the costs involved in building customer loyalty. Higher-profit customers should be given the highest-quality services. Spend more time analyzing this group to attract similar high-revenue customers through marketing.īoost your customer retention strategy by tailoring your efforts to each segment. In addition to eliminating clients that don’t generate any profit, you can focus your marketing efforts on those customers that generate the highest profits. You can market services more effectively. In these cases, it might be more financially viable to cut these customers loose. While it’s still important to focus business efforts on groups that generate lower profits, there may be some that actually cost more than the revenue generated. You can group customers into segments based on the value they generate. Once you’ve calculated profitability using the formula above, what can you do with it? There are several benefits.ĬPA enables cost-based customer segmentation. You’ll also need to know the duration a customer has stayed with your business.ĬPA = (Annual Profit) x (Time spent with company) Why should you calculate customer profitability? The first step in calculating CPA is to figure out the annual profit per customer. How do you calculate customer profitability? Customer benefits can come from smaller clients with brand loyalty. It’s not always the biggest customers who generate the highest revenues. This type of profitability analysis can often yield surprising results. It’s often a useful approach for service providers or SaaS companies, which focus more on customer acquisition rather than product sales. With CPA, a profitable customer would be one that generates revenue greater than the cost of these expenses. In other words, you can look at the cost of providing service to a customer. Typical costs for customer retention include things like marketing, customer service, fulfillment, and other operations expenses. While activity-based costing examines individual cost drivers to determine the profitability of a product, a customer profitability analysis applies this same approach to customers. Understanding customer profitability analysisĪ customer profitability analysis (CPA) looks at the revenue (or profit) that each individual customer generates. There are multiple benefits to understanding customer profitability, which we’ll explore below. Another option is to examine the revenue that each customer generates using a customer profitability analysis. If your business deals with customers, you may assign a customer lifetime value to each client. Profit sits at the heart of any business model, but there are multiple approaches to increase it.
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