Customers are essential for every business, and unhappy customers can make or break organizations. And it can be challenging to earn decent business revenue without them. One might think that the more customers you have, the better, right? It’s not always the case.
Getting forward in business means making the most of every opportunity. The bottom line improves as a result of increased productivity as a result of increased efficiency. Clients are essential but identifying the correct and wrong (or less-than-perfect) customers will help you become more successful in the long run. As a result, it’s critical to keep tabs on the progress of every one of your clients.
Because of the increasingly cutthroat nature of today’s business climate, most companies are required to conduct a profitability analysis, which can be broken down in terms of product, customer, or location, to improve their operational efficiencies.
Profitability analysis requires allocating costs and assessing profitability from several perspectives or vantage points within the organization. Because different accounting activities have varying degrees of granularity, calculating a company’s profitability at more granular levels can be challenging, but calculating the company’s overall profitability is easy. For instance, in many businesses, the amount of money made from sales is often broken down according to the customer and the product. The department might book expenses for information technology but not by the customer or the product.
You need to ensure that every consumer is boosting your bottom line.
Market share, business sales share, product mix, and profit contribution are standard metrics used by sales and marketing departments to assess their success. However, these metrics fall short of providing a whole picture. Overhead expenditures, which directly affect profitability, are routinely overlooked. The accounting and finance department’s reporting is the common denominator. ERP systems frequently stop reporting on customers at the profit margin.
Here are some recommended strategies to improve your Profitability Analysis and help you find the right customers.
Segment your customer base
Segmenting your clients is the first step in estimating customer profitability. Your industry may have a different approach to customer segmentation. It’s best to identify information such as age, income, and geographic location that may be used in various sectors. Others may rely more on psychographic information such as customers’ values, needs, or behavior patterns. To better grasp their clients and how their purchasing patterns affect their business, some companies may gather data from both sources.
Determine revenue and cost for each market
For each market category you’ve discovered, figure out how much profit you may expect from it. In addition to obtaining the sum of all your segments’ revenue, you can also compute your overall revenue. When estimating the revenue for each market, be sure to account for any modifications, such as discounts and service fees.
In the next step, you’ll need to figure out your costs for each market. Costs for product creation, client retention, and distribution and operations are included in this figure. The profitability of each market segment can be determined by subtracting the market’s cost from its revenue.
Identify each segment’s profitability and compare it to the overall profitability
Analyze and classify your market segments based on profitability after calculating customer profitability analysis for each market segment. To understand how each sector contributes to your overall aims, you can divide your markets into those that support high profitability, moderate profitability, and poor profitability. Analyze each market’s profitability based on the data you’ve collected for each segment. Assess your current business strategies to see if they help you maximize the profit from each of your market segments.
Performing your customer profitability analysis can assist you in identifying any operational factors that explain why a particular market segment has a lower profit level. For example, expenses that are exclusive to a given market may be more significant. If you’re spending more money on marketing to a specific demographic but not seeing the revenue you expect from them, the costs of running your business to serve that market are ineffective. Correcting this problem by reducing your marketing costs so that they are more closely aligned with the profit gained is possible.
Performance can be negatively impacted in various ways when there is insufficient visibility into true profitability. And apart from the impact on operations, profitability is the second most crucial factor in people’s long-term decision-making. One could also argue that it has a significant effect on strategy.
A customer profitability analysis is easy to understand but more complicated to perform. It can be an extremely detailed and complex process. Data can be challenging to gather, and when synthesizing the data and creating the profitability contribution, people lose sight of the profitability of the entire business. The good news is that we can help. Performance Canvas offers an add-on module to the base PCF product so you can thoroughly analyze your business profitability. Contact us to learn more about how this module works.
If you’d like to learn more about why Performance Canvas is the perfect solution to get the best insights from your profitability analysis, get in touch with our team for a free demo today.