Within any customer base, there are two things that differentiate customers. One is how they contribute to the business profitability and revenue and the costs and expenses that a business incurs while satisfying their respective customers. These differences developed the need of grouping all customers in different segments where their needs are satisfied according to the rules of customer’s profitability analysis. However, customer’s satisfaction varies according to the different segments that all customers fall under (E.porter 23-34.). Customer’s profitability analysis uses a table that helps categories the customers according to their contribution to the business.
CPA table
High
REVENUE
/>
Low
Low high
PROFIT
Johnsons Snacks Company is a local manufacturing industry that produces salty foods like potato chips to local general retail stores. It has three customer bases who all contribute differently to the business profitability level and revenue accrued. Well, very few customers can fall on the upper hand side on the figure above because it is hard to find a customer who is both highly profitable and generates the highest revenue. Grocery stores are one of John Snacks Company lucky customers. The stores accounts for the largest percentage of revenue that the company generates annually. It gives 74% compared to the other stores who only account for the remaining 26%. This revenue comes from the high amount product sales i.e. $ 2,100,000 that it buys per unit sales of 250 stores. At the same time, the grocery stores are the most profitable customers that the company has as it gives a total of $571 769 000. This makes it fall on the upper right hand of the figure above. The drugs stores fall on the upper left hand side of the customers’ segment figure as it only gives the company a high revenue but the profit obtained is low. The merchandising company falls on the lower left hand side because it gives the company the lowest recorded revenue of 400000 per unit sales and the lowest recorded profit of $ 1857990 (Walmart).
How to respond to discount 2 you letter
Murray, Johnson Snacks company manager, made the first right decision to carry out customer’s profitability analysis. This approach will greatly help the industry to know what to change and what not to change while addressing discount 2 you letter. The obvious benefits of customer profitability analysis lie in the insight of the uneven distribution of cost and expenses among the customers involved. Just like Johnsons Snacks Company, its cost and expenses are unequally distributed to the three customer base (Triest 23-34).
There are certain steps that the management will have to follow in order properly to respond to Discount 2 you letter. These steps are commonly followed in any customer profitability analysis for all customers segment that a company may be having some problems with .
Murray and the involved parties should first select list of active customers from the inactive customers. The company most active customer is Discount 2 you, because their unit sales per store is quite high compared to the low unit sales it has and its market also have a very high potential for future dealings. Identification of active customers ensures that the allocation of the business resources mainly focuses on the active customers. This implies that the company management should start considering how it will reduce the expenses on other stores and redistribute it to discount 2 you are merchandising store to help meet their needs (Walmart).
The next step is to design customers’ profitability model. In this implementation process, John Snack Company has to scrutinize all its operations i.e. the supply of potato chips and determine what drives their costs to these activities. The driver cost of the company activities is the number of unit sales they deliver to their customers (Triest 23-34).
The following step is a calculation of customers’ profitability in each customers segment. These calculations are performed by supplying the profitability model with data. In this case, the management would calculate the profitability of all customers segment by subtracting all customers’ expenses and costs from all individual customers’ sales revenues as shown below.
Grocery store
=> 250 * 2100000= 525 000000
=> 525000000- (3230000- 1.70) =$521 769 000.
Drug store
=>140 * 365000 = 51100000
=> 51100000- (625000- 1.90) = $504 749 000.
Discount 2 you
=> 6* 400000 = 2400000
=> 2400000 – (542000- 3) =$ 1857990
The other step is interpretation of results. The results obtained were due to what the management chose in the second step. The results showed that the grocery stores were special customers who generated high revenues for the company as well as recording the highest profits. On the other hand, the merchandising store, Discount 2 You was neither the most profitable nor the highest income generating customers, but the fact that the market has the potential for growing in the future, then the industry should consider satisfying its wants to some level that will not be too much capital intensive and time- consuming. Meaning, the industry can deliver goods four times a week as they requested in the letter. This can be done by switching the delivery vehicles to standard trucks. However, the company can ignore reducing the price of the products to the level that Discount 2 you stores wants as it would strain their economy, yet they are not out to please all customers (Triest 573-583).
In conclusion, we see that customers’ profitability analysis is an important tool that an organization can employ, because it guides the companies on how to react to satisfaction of customers who fall under different customers segment.
Works Cited
E.porter, Michael. Customer Profitability Analysis. Finance and Management (1996): 23-34.
Triest, Sander van. The implementation of customer's profitability analysis. Indusrtrial Marketing Management (2003): 573-583.
Walmart. Product and Gamble relationships with Walmart. New York, USA: Oxford, 2006.
