The Whale Curve and Customer Profitability Calculation

You probably know how to list the customers that bring in the most revenue for your company. But do you know which are the most profitable customers? What about customers who generate losses, considering all the cost related to their service? The customers who buy the most are not always those who bring the most profit to the company, as the biggest customers generally have special payment and delivery conditions that can increase costs.

This profitability analysis, known as Cost of Serving, is carried out in projects related to Customer Service and usually brings great discoveries to companies, being an important trigger for carrying out various initiatives within the company.

The main result of the analysis is a graph known as Curva da Baleia, which shows the percentage of profitable, unprofitable and zero-profit customers for the company. Image 1 shows a real example of a company that was the focus of a consultancy conducted by ILOS. The analysis showed that only 62% of the company's customers brought profit to the company, while 16% of customers eroded 6% of the accumulated profit.

Figure 1: Real example of a whale curve. Source: ILOS

This same analysis can be done for orders, helping the company to identify certain services offered to customers that could be eliminated or modified in order to increase profit.

The whale curve chart can have different formats, considering the degree of dependence of the company on certain customers and the number of customers with negative profitability that the company serves (subsidy degree).

Figure 2: Whale curve shape types. Source: ILOS

The best situation that a company can have is to have both a low degree of dependency and a low degree of subsidy, that is, the company only serves profitable customers and each one of them contributes in a similar way to the result. This, however, is not the situation of the vast majority of companies, as it is common for the company to have a few key accounts (key customers), which are essential to bring the financial result, and to serve a significant number of customers with zero or zero profitability. negative, both to dilute the fixed costs of the operation and by strategy, believing that they are customers with growth potential or customers who bring visibility to the company. However, it is important for the company to identify those customers with low sales volume and high service costs, which generally erode the company's bottom line and, therefore, should be served in a different way. Although eliminating this type of customer from the portfolio is also an alternative, the company needs to be very careful when doing this, since this type of customer also helps to dilute fixed costs and, with their elimination, new customers can start to have a negative profitability, as the share of fixed cost per customer will increase.

To arrive at the Curva da Baleia graph, it is necessary to calculate the profitability of each company order, subtracting from the net revenue (revenue with deducted taxes, in this case) the production costs (COGS) or purchase costs (COGS) of the product and the allocated costs of care. The latter is where the greatest difficulty of the analysis is found.

Figure 3: Calculation of the profitability of each order. Source: ILOS

All costs directly related to customer service must be included in the account, and the great challenge is to apportion them in a way that adheres to reality. Some examples of costs that should be considered are:

• Production / customization: costs generated by any change to the standard product requested by the customer.
• Dispatch and storage: warehouse costs (rent, electricity, water, etc.) and the team responsible for sorting and distributing orders. These costs can be apportioned considering the number of pallets/boxes moved per order, for example.
• Commercial actions: Costs of specific customer actions, such as discounts and sales incentives.
• Order billing: Billing and processing costs (salary of the team dedicated to this or the billing system), which can be apportioned according to the number of customer orders.
• Scripting: total expenses with routing (salary of the dedicated team or the routing system) divided by the orders of each client.
• Distribution: costs depending on the fleet profile and the distances traveled by each customer. Escort and security costs should also be prorated in this category.
• Monitoring: costs with monitoring technologies divided by the volume handled per order.
• Form of payment: cost per order associated with different payment methods (card, bill, cash, etc.). The payment period granted to the customer also makes a difference and enters this account.
• After sales: Costs with after-sales and customer-specific services.
• Fixed costs: Fixed costs, such as the salary of logistics managers, must also be apportioned and allocated per order.

Marketing and advertising costs, market research, administrative expenses not specific to customers, and the cost of losing and stealing products in the warehouse are examples of costs that should not be included in the cost allocation, as they are not directly related to the company's current customers or they are necessary costs for the mere existence of the company.

Interested in measuring the cost of serving each of your company's customers? In addition to carrying out consultations like this, ILOS also teaches the methodology of the cost of serving in the course Customer Service: Customer Service in Logistics.

To learn a little more about the subject, you can also consult the post written by Bernardo Falcon or articles written by Caius Rodrigues and by Marcus Cabral.