Discovering customer profitability includes determining whether the costs associated with acquiring and keeping a customer are greater or less than the benefits generated by the relationship.
Customer profitability is a process for determining whether the amount of resources expended to acquire and maintain a relationship with a particular customer is greater or less than the benefits generated from that relationship. In the strictest sense, relationship profitability is based on the difference between the costs of time and supplies consumed by the relationship and the revenue generated from sales made to that customer. Other formulas also allow for indirect benefits, such as the word of mouth the customer provides and the degree to which that customer’s recommendations lead to additional customer acquisition.
Knowledgeable and helpful customer service departments can help businesses stay profitable.
The most common model for determining a customer’s level of profitability involves evaluating what is known as the customer acquisition cost. These are simply all the costs associated with the sales and customer service efforts directed at that customer. Examples include direct and indirect costs, such as wages and salaries of staff who interact with the customer, the average cost of promotional materials sent to the customer, and any discounts given as an incentive to open an account.
Maintaining an ongoing relationship with customers is an important aspect of customer profitability.
If the costs involved in obtaining and maintaining an ongoing relationship with the customer are fully offset by the revenue generated from sales to that customer, the relationship is considered to break even. Here, the indirect benefits of the relationship can add some degree of profitability to the customer. If the customer has recommended the business to several acquaintances who later become customers and generate revenue for the business, this intangible benefit may be enough to continue the relationship, even if there is little or no direct return.
Failing to handle customer complaints can have a negative effect on customer profitability.
When the revenue generated exceeds the cost of securing and maintaining a customer relationship, customer profitability is more easily measured. Ideally, this profitability includes both tangible and intangible benefits, where the revenue stream generated is well above the costs of maintaining the account and the degree of customer loyalty is such that the customer routinely promotes the products offered by the company. business. As many businesses understand, maintaining customer profitability means having a strong customer service ethic that involves dealing with customer complaints quickly and effectively, as well as always listening to the voice of the customer, regardless of the nature of the query. comment or concern. If customer complaints are not addressed or conveyed that it is not worth the effort, it opens the door for competitors to step in and win over the customer, possibly never to return.