Focusing too much on less profitable customers leads to inefficient allocation of resources, and can impede your company’s ability to service and retain more profitable customers. Profitability and cost analysis can help businesses determine the profitability of a customer or a segment by evaluating customer spend and cost to serve. Advanced, cloud-based systems can help businesses select the right KPIs to measure customer profitability, determine the cost to serve a customer or customer segment, and identify the cost drivers that impact customer profitability.
Profitability and Cost Assessment Benefits
1. Improve Visibility
Modern profitability and cost assessment software can help cross-functional stakeholders such as finance, operations, sales, customer service and marketing understand which business questions need to be addressed via customer profitability analysis. They also improve visibility into your financial process and help you answer key business questions such as:
- Who are the most/least profitable customers and how are they different?
- Which prospective customers should we acquire, and which existing ones should we retain?
- How should we define our service levels for customers?
- Which customer behaviors increase or decrease margins?
- Can we improve profitability by altering the way we sell to, deliver to or serve a customer?
2. Identify Your Best Customers
Profitability and cost assessment software helps businesses analyze the cash impacts of various customers and market segments and help determine which segments are most profitable and identify market segments with high customer acquisition costs and low margins, taking into consideration the related discounting on top of sales, support and product development costs. Avoiding these segments can free up resources and cash that can be used to develop other market segments. Also, businesses can determine if their business models are being stretched by new distribution channels that are not generating enough activity, or low-volume services that are not generating enough revenue. Profitability and cost assessment can help you exit customer segments where the competition is too strong or where win rates are low.
3. Increase Cash Flow
Profitability and cost assessment improves real-time visibility into company performance and provides KPIs to measure business activities that directly impact cash. KPIs improve visibility into the business and allow tech CEOs to monitor and manage not only how much cash they are using, but also how effectively they are using it, increasing accountability across the organization. This can improve your business processes and strengthen your ability to serve customers, and increase your cash flow.
4. Optimize Cost Allocation
Profitability and cost assessment improves the transparency into cost allocation, significantly reducing the time spent on allocation calculations. Any unassigned or idle amounts are clearly visible, making it easy to see optimize cost allocations. It also increases accountability within the department and overall organization by providing insight into the allocation method. Business stakeholders often question large cost allocations due to a lack of clarity but efficient profitability and cost assessment helps them understand the metrics of the allocation and better align their business operations with the org-wide strategy.