ACCT 701 Chapter 6 Atkinson

Measuring and Managing Customer Relationships Chapter 6

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MSDA !pense !penses s 

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Marketing, selling, distribution, and administrative expenses Most are independent of the volume and mix of  products and cannot be traced traced through causal relationships to products

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MSDA !penses 

If managers only use financial performance metrics, they may take actions that improve shortterm financial performance but damage long-term customer relationships

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Both financial and nonfinancial metrics are needed to manage performance with customers

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o balance the pressure to meet and exceed customer expectations, companies should also measure the cost to serve each customer and the  profits generated © 2012 Pearson Prentice Hall. All rights reserved.

Customer Pro"ita#ilit$ 

!igh Cost-to-"erve Customers  #  $rder custom products  #  "mall order %uantities  #  &npredictable order arrivals  #  Customi'ed delivery  #  Change delivery re%uirements  #  Manual processing( high order error rates  #  )arge amounts of pre-sales support  #  )arge amounts of post-sales support  #  *ay slowly © 2012 Pearson Prentice Hall. All rights reserved.

Customer Pro"ita#ilit$ 

)ow Cost-to-"erve Customers  #  $rder standard products  #  !igh order %uantities  #  *redictable order arrivals  #  "tandard delivery  #  +o changes in delivery re%uirements  #  lectronic processing with 'ero defects  #  )ittle to no pre-sales support  #  +o post-sales support  #  *ay on time © 2012 Pearson Prentice Hall. All rights reserved.

Customer Pro"ita#ilit$ 

ilfredo *areto, Italian economist, developed the ./#0/ rule after noting that ./1 of a region2s land was owned by 0/1 of the population

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3hen companies rank products, they generally find that the top-selling 0/1 of products generate ./1 of the sales

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he ./#0/ rule applies well to sales revenues but it doesn2t apply to profits

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 A%C Customer Anal$sis 

he output from an 4BC customer analysis is often portrayed as a whale curve  #  4 plot of cumulative profitability versus the number of customers  #  Customers are ranked on the hori'ontal axis from most profitable

to least profitable

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Customer Pro"ita#ilit$ 

4 whale curve for cumulative profitability typically reveals5  #  he most profitable 0/1 of customers generate

about ./1 of total profits  #  he middle 6/1 of customers break even  #  he least profitable 0/1 of customers lose ./1 of

total profits, leaving the company with //1 of total profits

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Managing Customer Pro"ita#ilit$ 

!igh-profit customers appear in the left section of the profitability whale curve  #  hese customers should be protected  #  hey could be vulnerable to competitive inroads  #  Managers should be prepared to offer discounts,

incentives, and special services to retain the loyalty of these valuable customers if a competitor threatens

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Customer Costs in Service Companies 

"ervice companies must focus on customer costs and profitability because the variation in demand for organi'ational resources is much more customer driven than in manufacturing companies

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Customer behavior determines the %uantity of demands for organi'ational resources that produce and deliver the service to customers

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Measuring revenues and costs at the customer level provides the company with far more relevant and useful information than at the product level © 2012 Pearson Prentice Hall. All rights reserved.

&ncreasing Customer Pro"ita#ilit$ 

Companies have many options to increase customer profitability  #  *rocess improvements  #  7eploy menu-based pricing to allow customers to

select the features and services they are willing to  pay for   #  nhance the customer relationship to improve

margins and lower cost to serve  #  &se more discipline in granting discounts and

allowances © 2012 Pearson Prentice Hall. All rights reserved.

Process &mprovements 

Managers should analy'e internal operations to see where they can improve processes

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8or example, if a company receives a large number of small orders, the company could5  #  "trive to reduce costs of setup and order handling  #  ncourage customers to place orders electronically

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 Activit$'%ased Pricing 

*ricing is the most powerful tool a company can use to transform unprofitable customers into  profitable ones

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4ctivity-based pricing establishes a base price for  producing and delivering a standard %uantity for each standard product

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"pecial services may be priced 9ust to cover costs or also to earn a margin

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4ctivity-based pricing prices orders, not products

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Managing Relationships 

Companies can transform unprofitable customers into profitable ones by managing customer relationships  #  *ersuade them to use a greater scope of products

and services  #  stablish minimum order si'es

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Pricing (ater"all 

Before giving a customer a price increase, the company should examine the many ways it has already reduced the effective price the customer actually pays

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"mall concessions offered by different organi'ational units may accumulate into large revenue leaks

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*ricing 3aterfall charts list the multiple revenue leaks from the list price caused by special allowances and discounts granted to the customer © 2012 Pearson Prentice Hall. All rights reserved.

Salesperson &ncentives 

4 typical salesperson2s compensation plan sets minimum %uotas and provides incentive commissions based on sales revenue

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here may be special rewards such as vacation trips for achieving sales revenues above a stretch goal

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hese incentive plans sometimes fail to take into consideration decreases in profitability due to special discount allowances and arrangements negotiated to close the deal © 2012 Pearson Prentice Hall. All rights reserved.

)i"e'C$cle Pro"ita#ilit$ 

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Companies invest considerable resources to attract new customers, which may turn out to be unprofitable Customer )ifetime alue :C); calculates the customer2s profit each year after all costs and the discounted cash flows are compared to the initial ac%uisition costs to obtain the total value of the customer  4 company using C) is tracking how much it spent to ac%uire each customer and the profits earned © 2012 Pearson Prentice Hall. All rights reserved.

)i"e C$cle Pro"ita#ilit$ 

he critical parameters for calculating )ifetime Customer alue are5  #  Initial ac%uisition cost  #  *rofits or losses earned each year   #  4dditional costs to retain the customer   #  7uration of the relationship

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Measuring Customer Per"ormance *ith +on"inancial Metrics 

8ocusing on only financial metrics may cause a company to take actions that could risk the company2s long-term relationship with a customer 

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Customer Satis"action 

Most companies attempt to measure customer satisfaction by using surveys

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ypical survey %uestions address5  #  *roduct %uality  #  ase of ordering  #