All customers are not equal - some customers cost more to service than others. Without calculating the cost to service each customer, companies run the risk of pumping investments into customers - and high-turnover products - which could actually be eating into corporate profit.
"A harmful customer is one that costs more to serve than the revenue he generates," says Bruce Jones, sales manager for the Commercial Sector at SAS Institute, leader in business intelligence. "Every customer transaction has a cost associated with it, including the cost to enter the order and the cost of picking, packing and delivering the order. These can quickly eat into margins."
Other costs also need to be taken into account, including those of returned goods. Does the customer frequently return goods to me - at my cost - and then go on to order new ones - at my cost to ship? This can directly affect the customer's margin, especially if there are a lot of returned goods.
"If a customer is costing too much, the supplier should try to find out why, and could this be done by conducting an informal customer satisfaction survey," he says. "It is all about CRM, or understanding what a customer expects, or wants, and how suppliers can profitably deliver to those requirements.
"Sometimes there is no fit, but customers carry on buying out of goodwill, and the supplier continues to supply because market share is their main measure, instead of customer profitability. One thing that could be done in the customer satisfaction survey is to mention that the customer is costing the supplier money in particular areas, and ask for suggestions on how the problems can be solved."
Many organisations assume the best customers are those who place a lot of orders, but that is not always the case due to the costs incurred in managing and processing the sale.
"Identifying the cost of service, or the cost of producing and shipping a particular product, may sound easy to do," says Jones. "But while most companies have an idea of the total cost of the activities involved in servicing a customer - such as distribution or running a call centre - most cannot assign those costs accurately to individual customers or products.
"Indeed, most companies attribute the costs arbitrarily across their customer base or product lines. This hides the fact that some customers cost a lot more to serve than others and some products cost a lot more to produce and distribute. For example, delicate products - such as those made of glass - incur much heavier packaging and shipping costs than plastic ones."
Once a company understands how much it is spending on servicing a customer, it is in a position to improve that customer's profitability by changing the customer's processes and behaviour.
"Approaches are varied but could include the consolidation of daily shipments to less frequent intervals which are acceptable to customers who place orders one or more orders a day. This will improve the profit margin they deliver to the company," says Jones.
"Similarly, it could prove more profitable to convert customers from manual to electronic order placement as this removes some of the human costs from individual transactions."
And activity-based costing, a cost measurement technique, can help companies assign these costs accurately.
This will enable companies to see costs associated with particular customers. This includes issues such as:
* What was the total cost of my marketing campaigns to this customer?
* How many sales orders were processed for that customer and what was the processing cost?
* How many times did I ship to this customer and what did it cost?
Once the data to determine customer profitability has been captured and measured, it can help companies to decide what to do with what product, for which customer.
It also allows a company to determine:
* Can I consolidate shipments for this customer in order to reduce cost of service?
* Can I move this customer to a less expensive communication channel?
* Are there products that I could offer this customer that I could include in the same shipment as products they already buy?
* This type of customer is asking for a new service (or product), what is the cost, process and profit impact if I choose to do this?
SAS Activity-Based Costing Solutions provide accurate financial information in a form that mirrors the day-to-day activities of people and resources.
"As a result, managers can easily identify the root cause of costs, track those costs as they move through the organisation and ultimately determine the true contributors to and detractors from financial performance," says Jones.
Jones also points out that companies too often try to solve problems with technology, or unilaterally, instead of talking to the customer.
"With this level of intelligence, managers can make sound strategic and operational decisions that lead to improved performance, greater profitability and a solid competitive-edge."
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