Hilton Maher Selto. 6 Managing Customer Profitability.
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Transcript of Hilton Maher Selto. 6 Managing Customer Profitability.
Hilton • Maher • Selto
6Managing Customer Profitability
6-3
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Using ABC to determine the activities, costs, and profit associated with serving specific
customers.
Using ABC to determine the activities, costs, and profit associated with serving specific
customers.
For various reasons, some customers are less profitable than others.
For various reasons, some customers are less profitable than others.
Customer makes frequent order changes.
Customer needs special parts.
Customer is difficult to please.
For
E
xam
ple
Customer Profitability Analysis
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McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Customer Profitability Analysis
Once we know which customers are the least profitable, we can modify our relationship to
improve profitability.
Once we know which customers are the least profitable, we can modify our relationship to
improve profitability.
I hate to do this, but
we just can’t continue
doing business with
you.I hate to do this, but
we just can’t continue
doing business with
you.
We’ll send a team to your plant next week and help you set up an ordering system that gives
us more lead time.
We’ll send a team to your plant next week and help you set up an ordering system that gives
us more lead time.
If you ask for fewer changes, we can charge you less!
If you ask for fewer changes, we can charge you less!
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There are two primary steps:There are two primary steps:
Customer Profitability Analysis
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McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Measuring Customer Profitability
Studies have shown that only 20% of a company’s customers contribute to profits.
The remaining 80% generate losses.
Studies have shown that only 20% of a company’s customers contribute to profits.
The remaining 80% generate losses.
Profit can be measured by:Profit can be measured by:
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Measuring Customer Profitability - Example
Cus
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Customer #
Assume Koala Camp Gear looks at 5 of its customers.
Assume Koala Camp Gear looks at 5 of its customers.
Bar graphs are common
analytical tools.
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Measuring Customer Profitability - Example
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Question:
Why are these two customers
not profitable?
Customer #
Note that attention should be focused on customers #102 and #114.
Note that attention should be focused on customers #102 and #114.
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McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Measuring Customer Profitability - Example
Comparing the customer-related costs for each customer can reveal helpful insights.
Comparing the customer-related costs for each customer can reveal helpful insights.
For Customer #102, costs of order processing,
engineering/design changes, and special
handling are above normal.
For Customer #102, costs of order processing,
engineering/design changes, and special
handling are above normal.
For Customer #114, the cost of special packaging is 4× the norm. The cost or special handling is 6×
the norm.
For Customer #114, the cost of special packaging is 4× the norm. The cost or special handling is 6×
the norm.
We Investigate and find. . .We Investigate and find. . .
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Processing Orders Sales Contacts Sales Visits Processing
Shipments
Processing Orders Sales Contacts Sales Visits Processing
Shipments
Typical Customer-Related Activities Include:Typical Customer-Related Activities Include:Typical Customer-Related Activities Include:Typical Customer-Related Activities Include:
Billing Engineering/Design
Changes Special Packaging Special Handling
Billing Engineering/Design
Changes Special Packaging Special Handling
Identify Effective & Ineffective Customer-Related Activities
Study closely all the customer-related activities that drive cost.
Study closely all the customer-related activities that drive cost.
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Customer Profitability Analysis
HealthWave, Inc. sells non-prescription pharmaceuticals to
three major customer types:
•Pharmacies
•Groceries
•Herbal Therapists
HealthWave, Inc. sells non-prescription pharmaceuticals to
three major customer types:
•Pharmacies
•Groceries
•Herbal Therapists
Which of these Which of these customer customer
groups is the groups is the most most
profitable for profitable for HealthWave?HealthWave?
6-12
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Sales Pattern AnalysisExh.6.5
At this point, it would appear that Pharmacies
provide the highest contribution margin
ratio.
Let’s examine further.
At this point, it would appear that Pharmacies
provide the highest contribution margin
ratio.
Let’s examine further.
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Sales & Admin Cost Analysis
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Selling Cost Analysis
HealthWave sells its products using sales personnel in the field and telephone ordering. A summary of those cost appear below. Note that Herbal Therapists appear
to have the lowest selling costs.
HealthWave sells its products using sales personnel in the field and telephone ordering. A summary of those cost appear below. Note that Herbal Therapists appear
to have the lowest selling costs.
Exh.6.6
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Marketing Cost Analysis
Marketing costs include personnel, databases, equipment, and facilities. HealthWave’s costs can be broken down into Marketing Management Costs, Promotion and Incentive Costs, Advertising
Costs, and Catalogue Development Costs.
Again, Herbal Therapists have the lowest marketing cost.
Marketing costs include personnel, databases, equipment, and facilities. HealthWave’s costs can be broken down into Marketing Management Costs, Promotion and Incentive Costs, Advertising
Costs, and Catalogue Development Costs.
Again, Herbal Therapists have the lowest marketing cost.
Exh.6.7
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Distribution Costs Analysis
Distribution costs include packing, shipping and delivering products or services to customers. HealthWave delivers goods
using its own trucks and a private delivery service, PackageXpress.
This time, Grocery customers have the lowest distribution cost.
Distribution costs include packing, shipping and delivering products or services to customers. HealthWave delivers goods
using its own trucks and a private delivery service, PackageXpress.
This time, Grocery customers have the lowest distribution cost.
Exh.6.8
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G & A Costs Analysis
Typically, general and administrative costs are not directly customer-related. These costs can often be difficult to trace to specific customers. HealthWave breaks them into two broad
categories; Customer Service and Manufacturing Support
Again, Herbal Therapists have the lowest marketing cost.
Typically, general and administrative costs are not directly customer-related. These costs can often be difficult to trace to specific customers. HealthWave breaks them into two broad
categories; Customer Service and Manufacturing Support
Again, Herbal Therapists have the lowest marketing cost.
Exh.6.10
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McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Customer Profitability Analysis
Finally, we put all the information together to determine which customer-type is the most profitable. The Groceries appear to be
the most profitable customer.
Finally, we put all the information together to determine which customer-type is the most profitable. The Groceries appear to be
the most profitable customer.
Exh.6.11
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Common-Sized Profit Statements
To better compare different sets of data, the dollar amounts can be recast as a percentage of revenues.
To better compare different sets of data, the dollar amounts can be recast as a percentage of revenues.
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What To Do?
The Pharmacy customers are not contributing to HealthWave’s profitability. What are the options?
The Pharmacy customers are not contributing to HealthWave’s profitability. What are the options?
Do NothingDo Nothing
Drop pharmacy customers
Drop pharmacy customers
Decrease operating
costs
Decrease operating
costs
Increase efficiency of
serving pharmacy customers
Increase efficiency of
serving pharmacy customers
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McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
End of Chapter 6
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