Customers Don't Behave like Computer Models
Banerjee, Jyoti, The Independent (London, England)
In an age where dot coms are robbing bricks-and-mortar companies of their customers using online attractions, the question for both sides is how to know which customer is profitable and which is not. After all, you don't mind losing your unprofitable customers but you definitely want to grab anybody else's profitable customers. But how do you tell? The answer, according to just about every software firm in the market, is that you should be investing in a new customer relationship management (CRM) system.
But it's not that simple. Think about the qualities of customer profitability. At its most basic, it is the difference between revenue and cost on a per customer basis. There's nothing difficult about that.
But here's an example to illustrate how hard profitability analysis can really be.
Let's say you have two customers, George and Karen. Each orders pounds 20,000 worth of Product A every month. Given that they are ordering identical goods (assumption: the costs of the product are the same) then as long as they each order the same amount, George and Karen are identically profitable .
But no two customers are the same. So let's add some twists that better reflect the way we do business. George takes his entire order of Product A in one monthly shipment. Karen wants her order shipped in four weekly instalments. Suddenly, the profitability picture has changed. Although revenues from each customer and the cost of procuring, manufacturing and shipping Product A remain the same, the cost of servicing the second client is higher.
Next you must take into account the fact that Karen has a special discount on all her purchases with you because she also buys pounds 10,000 of Product B every month. By now, in terms of Product A, she is looking very unprofitable next to George - until you remember that you only have his account because you send him on an all- expenses-paid trip to Spain once a year to play golf.
You must also account for the manufacturing cost of Product B, which Karen buys but George does not. …