But to understand which of these customers are and aren t driving value, it s necessary to understand their margin contribution from the goods and services they buy as well as their consumption of indirect corporate resources. Exposing resource consumption patterns that traditional cost accounting practices can t. Attributing activity costs to customers based on their consumption of the drivers of those activities and their underlying resources. As companies implement customer-centric business strategies and CRM solutions, it becomes increasingly important for them to understand the value of customer relationships. Unfortunately, few companies can quantify profitability at a customer or household level. But customer revenue alone is an inadequate measure of customer value.
Customer profitability gets closer to the answer.
In addition, few customer profitability models include costs beyond the most obvious and direct costs of sales. They rarely include the cost to acquire the customer or the cost to retain and serve that customer after the sales transaction is complete. In addition, customer profitability typically provides only an annual or monthly snapshot of the customer s value. For companies with a high rate of customer turnover, as well as those with long-term customer relationships, periodic measures are usually insufficient. For customer profitability to help you understand customer value, it should be viewed across more than a single year ideally over the lifetime of the customer s relationship with your organization.