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PROFITABILITY
ANALYSIS
Presented
By :
Flow of Presentation
Definition Of CPA
CRM
Importance of CPA in CRM
A Hypothetical Situation
Determining Customer Profitability
The CPA Process
From ABC to CPA
Conclusion
Definition
Analysis that assigns revenues and costs to major
customers or groups of customers rather than to
organizational units, products, or other objects.
The results may direct organizational resources
towards more profitable uses.
It is an application of segmented reporting in
which a customer group is treated as a segment. It
is especially helpful when combined with an
activity-based costing approach that determines
which activities are performed for each group and
assigns costs based on appropriate drivers.
Example : Activities, their drivers, and their costs
may be classified as order level, customer level,
channel level, market level, or enterprise level.
Contd…
In other words, Customer
profitability analysis combines
analysis of manufacturing costs
based on customer requirements with
analysis of the costs of serving
customers through different
channels.
Example :
Consider the mapping of the activity “Provide Customer
Support over the Telephone,” which has a cost of
$5,000,000 to customer A and customer B.
Contd…
Customer A receives 1500 minutes of
support, while customer B receives 3500
minutes of support during the same period.
Step 2
Next, understand what you do to meet your customers’
needs i.e. map the various activities that go into serving
them. The best way to do this is to develop a simple process
flow diagram representing customer interactions and
identifying where the cost elements lie. At this stage it
might be useful for you to map your customers’ activity
cycle and develop some form of graphical checklist .
Additionally, the sequence of customer interactions might
vary depending on the nature of your business.
CONTD…
At this stage, using estimates is acceptable. Much
of the analysis becomes easier once you have
gained a clear understanding of your basic
customer interaction processes and how many
customers you have.
Step 3
For each cost group (sales force, call centre, etc.)
identify what activities drive costs. Begin by
allocating those costs that are simple to categorize
and that you can easily relate to specific activities.
Use your judgment to allocate those costs that are
not as easily traced.
CONTD…
Step 4
Finally,
just subtract the overhead
costs that you have just computed in
step 3 from the contribution margin
of step 1.
From ABC to CPA
Allocation:
Costs are allocated to products based on assumed
linkages or convenient alternatives such as direct
labour hours
Activity-Based Costing
Traces costs based on cause and effect