The definition of customer profitability is “the profit earned by a company from serving a single customer or a group of customers over a specified period of time, specifically the difference between the revenues earned from and the costs associated with the customer relationship over a specified period of time”. To put it another way, customer profitability is concerned with the profitability of a given clientele.
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Purpose of Measuring Customer Profitability
Customer profitability is a critical statistic that is used to inform decision-making throughout the organisation’s many departments. These choices have an impact on the value exchange that occurs between the client and the company. Having determined the profitability of our clients, we can now determine who our customers are and how we generate a profit from them. It has the potential to deliver valuable insights into the business that lead to a greater emphasis on what is best for the customer
Customer profitability analysis allows an organisation to segment its customers by their profit contribution to its brand and optimise their marketing, customer service, and operations costs around the customer segments who are the most profitable for its brand.
Customer Lifetime Value (CLV)
A forecast of the total net profit earned by a customer over the course of their whole business relationship with the organisation. For the purpose of calculating the customer lifetime value (CLV), the following formula should be used:
CLV= Average order value × Purchase Frequency Rate × Average Customer Lifetime
For example, Priya visits Barbeque Nation once per month and spends 1500 rupees per visit over an average lifetime of 8 years.
Her customer lifetime value would be calculated as:
=1500 × 12 × 8
= 144,000/-
How to Analyse Customer Profitability?
Choosing the clients who will have the most potential to have a beneficial impact on the company’s bottom line. Increasing the concentration of time and resources in a targeted manner is required. If companies concentrate their efforts on a smaller number of consumers, they may see greater profits. Businesses can avoid unproductive clients as a result of this. It also helps to reduce the amount of time spent on customers who are not profitable.
Set Targets for Every Customer, Including Those That Are Not Profitable or Break Even
Setting a target could be as simple as keeping track of each customer’s existing spending patterns. Creating a model that predicts future spending behaviour gets more difficult when dealing with large amounts of data. It consists of an analysis of customer profitability.
Profitability of Clients Can Be Graphed Over Time
This allows to track the progress of clients’ performance over time. The capacity to detect long-term trends in client profitability is one method of doing so. Customers’ future spending behaviour can be predicted with the use of this tool. Companies can also notice changes in their purchasing patterns. They may also use it to determine the characteristics of clients who perform better than average.
Making use of this information allows companies to better target marketing efforts toward more qualified customers. Customer profitability analysis can be applied to a variety of other crucial company KPIs. Market share analysis, customer churn rate, and other metrics are among those available.
