Expert's Corner


Jim Berkowitz
Solutions Product Manager
ShowCase, division of SPSS
jberkowitz@spss.com


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  Can CRM initiatives directly increase our profitability?
 
Absolutely. But doing so will require you to view your business in a more customer-focused manner.
 
Typically, company profitability is only expressed from a financial perspective:
 

Net sales - Cost of sales - Selling and administrative expenses = Operating profit
This approach focuses attention on who spent what, rather than on how the business is using its available resources.
 
But why are you in business? To make a profit, is the obvious answer. Fundamental to doing that, however, is providing customers what they want, at a price they are willing to pay, while maintaining the highest possible levels of customer satisfaction and loyalty. That being so, all the costs incurred by your company can ultimately be assigned to the customers who are buying your products and services. In other words, your company's profitability can be expressed as:
 
Customer revenue - Cost to produce goods and services - Cost to serve customers = Operating profit
There are two popular ways to calculate customer profitability. One way is to utilize the customer-based accounting principles described by Jay Curry in his book, "The Customer Marketing Method: How to Implement and Profit from Customer Relationship Management," (The Free Press, 2000). The second approach is to implement some type of activity-based costing (ABC). Both methods provide the means to express all company revenues and expenses on a customer-by-customer basis.
 
What many companies learn when they begin to analyze customer profitability is that the top 20% of their customers deliver 80% of their revenues. Even more telling, this 20% delivers not only all their profits, but also makes up for the money they lose on other customers. (Yes, many companies lose money on 80% of their customers!) Imagine how much more profitable your company could be if you could increase the revenues from profitable customers and either eliminate unprofitable customers or decrease the costs of serving them.
 
But first you need an accurate analysis of your current situation. This is precisely what an analytical CRM solution that focuses on customer profitability can provide. Only when you can rank your customers from most to least profitable can you take action that can directly impact your company's bottom line.
 
There are three primary ways to improve customer profitability:
  1. Reduce the costs associated with serving existing customers and acquiring new ones
  2. Identify customers with the greatest potential for spending more with your company and increase the revenues you obtain from them
  3. Improve customer retention, so that you can sell to your customers over a longer period of time
But where should you begin? First, once you have classified your customers according to profitability, you should develop strategies to keep your most profitable customers "super-satisfied" while maintaining or growing your share of their business. These strategies should include:
  • Regularly obtaining and summarizing customer satisfaction feedback
  • Identifying areas where dissatisfaction is having the most negative impact on customer retention and loyalty, and addressing these situations
  • Focusing more marketing and selling resources on these customers
Second, you should develop strategies to address your less profitable customers. There are two types of companies in this customer segment: companies that are giving you most, if not all, of the business that's available from them; and companies that are giving you only a small share of their business. When companies analyze this customer segment, they often find that between 5% and 30% of their less profitable customers have significant potential for growth.
 
These customers generally represent the greatest potential for increased revenues. To take advantage of this potential, you need to develop processes to identify the customers that are giving you only a small share of their business. Then your marketing and sales teams should focus their attention on strategies and tactics for realizing additional revenue from these "most growable" customers.
 
Third, you should begin to isolate other opportunities to increase customer revenues or reduce the cost of serving customers - especially the cost of serving unprofitable customers that are already at the top of their spending levels. To do this, you can group customers according to similar behavior characteristics. Here are some of the typical behavior characteristics that affect customer profitability:
Less Profitable CustomersMore Profitable Customers
1. Place a lot of SMALL orders 1. Place fewer LARGE orders
2. Order LOW margin products 2. Order HIGH margin products
3. Require LARGE discounts 3. Require LITTLE discounting
4. FREQUENTLY change orders 4. RARELY make order changes
5. Require A LOT of support 5. Require LITTLE support
6. Submit MANY returns 6. Submit FEW returns
7. Pay SLOWLY 7. Pay ON TIME
By segmenting customers with common behavior characteristics, you will be able to uncover opportunities for further increasing revenues or reducing costs. For example, you might implement internal process improvements, make changes to pricing policies, bundle (or un-bundle) services, shift sales-channel account responsibilities or provide other incentives to customers that can move them towards more profitable behavior.
 
Finally, you need to be able to measure the results of your efforts. Even though it seems that everyone's heard the statement, "If you can't measure it, you can't manage it," many companies continue to try to implement new strategic initiatives without having systems in place to monitor how they are doing. More often than not, the lack of timely and meaningful performance metrics is one of the key reasons for disappointing results.
 
For a strategic initiative aimed at improving customer profitability to succeed, you need an analytic CRM system that can measure the value, profitability and behavior of your customers over time. With such a system in place, your management team will be able to get timely feedback on the results of their efforts and make informed tactical decisions to keep things progressing in a positive manner. Combining the right strategic plans with a powerful set of analytic tools can make customer profitability an attainable goal for any company.
 
 

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