Measuring and Managing Customer Profitability

The article evaluates the way in which a company can measure value of the customer. According to the article, there is an extensive gap between the sales and marketing role and the CFO’s function. Whereas the sales and marketing function can detect valuable customer, traditional accounting is concerned with evaluating the total revenue without evaluating profitability of maintaining each customer. To enable the organization to measure the value of the customer, and be able to concentrate on profitable ones, the article proposes the use of “profit margin management’ methods. Some of the profit margin management methods include understanding sources of profit and expenses and Activity Based Accounting (ABC) (Cokins 23-24). After understanding its costs and revenue model, the company has to shed off the unprofitable customers (through such passive ways as gradual price increase) while striving to retain profitable ones through such methods as pricing incentives, streamlined delivery process, and cost reduction.

The article suggest that ABC method is an invaluable tool, which will accurately and economically trace the expense of an organization to the products and customer groups, which place a different level of workload demand to the organization. In applying the ABC, the organization uses various stages to segment and trace expenses and resources. According to the article, ABC accounting software enables accounting person trace cost of the product to the final object. Customers are usually the final object in the costing system because they produce a need for the organizational expenses (Cokins 25). As such the ABC costing software helps to isolate activities that do not contribute directly to the customer’s value while at the same time generates regular reports that add to the satisfaction of the customer or value of any product.

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