How to Analyze Customer Profitability Using Four Major Drivers

Customer profitability is far more than just the calculated lifetime value of a customer, and more than the gross or net margin generated from a transaction. A proper customer profitability analysis involves every touch point a customer has with your company, including customer service contacts, returns, custom fulfillment costs, and more.

four major drivers of customer profitability measurement

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Measuring customer profitability is crucially important for continued business success because it helps determine whether certain customers are costing you money rather than making you money. Once you have a framework in place to measure this, it becomes easy to analyze customer profitability as frequently as makes sense for your business. You may find that a customer group you thought was the most important is actually of lower value to your company than others. These findings can then help shape and shift your business strategy to keep your initiatives and goals aligned.

The best way to begin measuring customer profitability is by identifying all the potential channels a customer can interact with your company. By understanding all potential channels of contact, you can begin to evaluate the costs associated with those channels. This not only includes the product or service cost of what your customers buy, but may include other costs such as:

Some businesses have well-defined customer segments, allowing them to more easily analyze their customer profitability. These segments can be based on the size of the business or business unit they buy from, or on the behavioral segmentation of customers derived from a segmentation exercise.

In this step, you need to put on your detective hat and search for the details necessary to help get your colleagues from Step 1 to here. The key questions to ask are "Do we have the data?" and How easily tracked and accessible is the data?" By asking these questions, your organization can start to clearly define customer profitability metrics, so you can dig into which customers are costing you more money than others.

Marketing spend and cost per transaction is another important customer profitability metric to consider, as there can be hidden pearls in this data when you break it down by marketing channel and tie it to specific customer groups.

A good way to continue improving your customer profitability is to focus on maximizing your most profitable customer group. Understanding how much of the total business that group is, if it could be increased, and the most effective way to do so will help your organization evaluate the necessary resources, budgets, and requirements to grow that customer segment.

Hearing Aids: Hearing aids are so expensive that only 14% of the approximately 48 million Americans with hearing loss use them. On average, they cost more than $5,000 per pair, and those costs are often not covered by health insurance. A major driver of the expense is that consumers must get them from a doctor or a specialist, even though experts agree that medical evaluation is not necessary. Rather, this requirement serves only as red tape and a barrier to more companies selling hearing aids. The four largest hearing aid manufacturers now control 84% of the market. In 2017, Congress passed a bipartisan proposal to allow hearing aids to be sold over the counter. However, the Trump Administration Food and Drug Administration failed to issue the necessary rules that would actually allow hearing aids to be sold over the counter, leaving millions of Americans without low-cost options.

Over the past four decades, the United States has lost 70% of the banks it once had, with around 10,000 bank closures. Communities of color are disproportionately affected, with 25% of all rural closures in majority-minority census tracts. Many of these closures are the product of mergers and acquisitions. Though subject to federal review, federal agencies have not formally denied a bank merger application in more than 15 years.Excessive consolidation raises costs for consumers, restricts credit for small businesses, and harms low-income communities. Branch closures can reduce the amount of small business lending by about 10% and leads to higher interest rates. Even where a customer has multiple options, it is hard to switch banks partly because customers cannot easily take their financial transaction history data to a new bank. That increases the cost of the new bank extending you credit.

They conducted a quantitative research study with hundreds of customer service organizations and 97,000 customers to investigate their service interactions. The data uncovered four major, and unexpected, findings.

Based on the findings from the survey, the team at Gartner embarked on a multiyear study to discern the sources of customer effort and what service organizations can do to minimize those efforts. The results are four best practices shared by low-effort service organizations.

Do customers come in several times a week, which might be common with a coffee shop, or only once every few years, which could be the case at a car dealership? The frequency of visits is a major driver of CLV.

Customer lifetime value represents the total earnings from a customer over the duration of their relationship with the business. This helps a company forecast profitability, set customer acquisition budgets and determine goals for growth and improvement.

In this article, we explore how data and analytics are beginning to transform the art and science of customer experience. We present new research that brings clarity and a fact base to the shortcomings of survey-based measurement systems. We then examine how a few leaders have implemented data-driven CX systems and in turn reduced churn, boosted revenue, and lowered cost to serve. We end with insight on how to get started, including four key steps for CX leaders as they transition toward data-driven insight and action.

One leading credit-card company wanted to adopt a more omnichannel strategy and boost its performance in digital channels. It focused on building a CX data and analytics stack to systematically identify, improve, and track the factors influencing customer satisfaction and business performance across 13 priority journeys. It started by gathering interaction, transaction, and customer-profile data with a journey analytics platform to identify drivers of satisfaction for each journey, as well as areas where it could improve. The platform included data on repeat interactions, lead times, and how often customers hopped from one channel to another. It also encompassed more subtle factors, such as whether the company effectively handled negative outcomes and what communications took place at various points in time.

4. Focus first on the use cases that can drive quick value: Data-driven, predictive systems offer CX organizations a unique opportunity to tie CX strategies to tangible business value. In the early days, it is important to have a clear view for how the insights will be applied and to focus on a few specific use cases that will create immediate return. As a simple framework, organizations can review major sources of opportunity, pain points, or both across existing customer journeys and think through how a predictive system might create new solutions or enhance existing ones that may have a direct impact on loyalty, cost to serve, cross-sell, and up-sell behaviors.

In the first part of this two-part series we looked at the calculation of product, service, and customer profitability and how this can start to address the deficiencies in assessing financial attractiveness based on revenues alone. Whilst this provides improved insight, it does not address three critical variants that can have a substantial effect on customer lifetime value (CLTV):

The timing of receipt and payment of cash is a critical component of the forecast to be used for value calculation, and this is represented by free cash flows. The adjustments required for cash will depend on how the customer profitability figures have been calculated. Profitability measures may include noncash expenses but exclude capital expenditure and changes in levels of working capital.

For instance, in the forecasting process, the indirect costs of premises and technology tangible assets may have been allocated to the cost of staff resources. Any adjustments for capital expenditure, depreciation, and amortisation will need to be made recognising how these profit-based allowances were created in the first place. Realistically, when looking at customer profitability, the key areas for adjustments will probably allow for working capital and tax.

Deriving a forecast of customer cash flows requires careful consideration of the various life stages of that customer's relationship with the organisation. Analysis of life stages can reveal vast differences in activity and profitability over time.

The next stage is to identify common characteristics for all customer groupings at differing levels of value. This will assist the identification of the drivers of varying levels of profitability and the strategic actions to be taken. It will also improve the development of acquisition strategies for customers that are more likely to prove profitable.

When calculating customer profitability, it is beneficial to complete this at the lowest level of detail in order that the results can subsequently be aggregated by any groupings that are available to enable multi-dimensional reporting.

CLTV is more ambiguous and difficult to quantify than looking simply at revenue or profitability, but the resultant insight can be far more powerful in informing operational and strategic management. Similar to the animals in George Orwell's Animal Farm, it will become evident that all customers are equal, but some are far more equal than others.

The analysis in Table 2 assumes that drivers have hourly compensation of $11.77 but must purchase benefits that cost $2.56 per hour. Is this excessive? Or is it not enough to cover what a full-time driver requires or would receive in an alternative occupation? A major challenge for any Uber driver is what every independent contractor faces: it is difficult to obtain replacements for social safety net benefits and expensive for individuals to purchase potential replacements. 2ff7e9595c