In Part 1 of this work, the initial topics that contained the main motivations for structuring a customer profitability analysis process based on the cost of serving and the description of a methodology for developing, implementing and maintaining this process were addressed.
In Part 2, the stages of analysis of results and preparation of action plans will be discussed in greater detail. Examples of what the drivers of analysis and how the company should interpret and unfold the results obtained in action plans and strategies aimed at increasing profitability. In addition, a conclusion about all the work is also placed to make clear the benefits and care that must be taken when implementing a process of this type.
PART 2
RESULTS ANALYSIS
The purpose of analyzing the profitability of customers is to have calculated the profitability that the company has with each one of them and, based on that, to make decisions that enable the leverage of the company's strategic objectives (reduction of costs, increase in the level of service, etc.).
In studies already carried out on the subject, examples are cited in which customers who represented a large part of the volume sold by the company had negative profitability. That is, the sales, marketing, logistics and administrative structure made available to serve the customer (usually high, as he is responsible for a large revenue) was not being offset by the financial return that he brought, even with a high representativeness in volume .
Figure 4 shows one of the main analyzes that must be carried out after measuring profitability per customer. Known as the “Whale Curve”, the graph makes it possible to clearly identify that in the company's portfolio there are basically three types of clients: the profitable ones, the ones that do not bring return and the margin consumers.
Figure 4 – Analysis of the “whale curve”
Studies carried out on the subject indicate that typically, about 20% of customers generate from 150% to 300% of profit, 70% are in a region of practically zero profit and 10% of them reduce from 50% to 200% of the company's profitability and take the curve to your “Sea Level”. The difference between the maximum point of the curve and the “sea level” corresponds to how much, theoretically, margin can be achieved.
After building the “whale curve” and analyzing the number of customers by level of profitability, it is important to also analyze the shape of the curve. This is because, depending on this format, the company may be presenting a higher or lower level of risk in relation to both the dependence it has on a few customers and the size of the margin that is being lost and is subsidized by those profitable. Figure 5 seeks to analyze the different curve profiles.
Figure 5 - Profiles of the whale curve in relation to the degree of dependence and subsidy of customers
The degree of dependence is greater the closer the maximum point of the curve is to the Y axis. In other words, the company has few profitable customers in its portfolio. On the other hand, the degree of subsidy is greater the farther the maximum point is from “sea level” (profitability = 100%).
Understanding these assumptions, the first situation, in which the degree of dependence and degree of subsidy from customers are low, is the one that configures a better scenario for a company. That's because it has a well-distributed portfolio that generally brings profitability to the business. It is a rare curve profile to be found in studies that have already been carried out on the subject, but it is a scenario to be pursued.
The second situation, in which the degree of dependence is low, but the degree of subsidy is high, reflects a scenario in which the company does not present such a high risk as it has a high base of profitable customers. However, the fact that it carries a small customer base with very negative profitability means that its final profitability is considerably reduced. In this case, the company needs to understand why a few have a very negative profitability.
The third situation, in which the degree of dependence is high, but the degree of subsidy is low, also does not translate into a scenario of high risks, because although its portfolio of profitable customers is relatively concentrated, the others end up not having a negative profitability very high and do not harm the company's final profitability so much. In this situation, you must always be alert to maintain the relationship with your profitable customers and seek ways to improve efficiency and reduce costs for the portfolio of those that are unprofitable or with small negative profitability.
The fourth situation is the most risky. In it, both the degree of dependence and subsidy are high. That is, the company has few customers with positive profitability, but these profitability are very high and it has many with negative profitability, but these profitability are very low. This is a very complex scenario, as it is necessary to act directly both in maintaining and improving the relationship with profitable customers and in the detailed study of why you have customers with high negative profitability. Ideally, in this case, the company should seek to balance its portfolio more in order to dilute its risks.
After diagnosing which risk situation the company is in based on the interpretation of the “whale curve”, it is important to begin to understand which are the main drivers that drive a customer towards positive or negative profitability.
An important variable is the average customer order size (drop size), which is often guided by the existing minimum order rule. Your analysis can bring good answers as there is usually an existing infrastructure for customer service, which in certain cases cannot be diluted by the size of the order that is carried out by the same.
For example, in some cases, in order to distribute products to its customers, the company needs to carry out the entire process of routing, palletizing, sorting, assembling the load and delivering it to the point of sale, regardless of the size of the order. If this is too small and the financial return it will bring to the company does not offset the costs, the customer will have negative profitability. Figure 6 shows an example of the interference of the size of the drop size average in customer profitability.
Figure 6 – Analysis of drop size versus customer profitability
As you can see in this example, the average customer order size is closely related to whether it is profitable or not. Most customers who had an average order of up to 10 boxes showed negative profitability. As the size of the average order has increased, the revenue per order is greater, but there is no increase in the fixed costs of serving, making the orders and, consequently, the most profitable.
It is also important to note that there is a percentage of customers who, despite having a low average order, showed positive profitability. On the other hand, there were also situations where the average order was high and even so the customer was not profitable. In these cases, it is essential to analyze in greater detail the costs that generated these results and outline plans to improve the company's profitability. Others drivers may be interfering with this non-standard result.
Another variable that can affect profitability is the mix of ordered products. Within the company's portfolio it is common to have products with higher or lower margins. Orders where products prevail premium, that bring high revenue and are not associated with many costs, directly affect the profitability of customers.
Therefore, an important analysis to be carried out is which mix of products for each of the customers and check whether, in the case of those with negative profitability, the product basket is the most appropriate. The analysis of the product portfolio can also be performed using the same methodology of profitability per customer, but with a product view. This type of analysis can greatly support the decision to include or exclude products from the portfolio.
Another variable linked to the commercial area are the discounts, bonuses and commercial actions carried out to boost sales. In order to seek to increase customer volume, avoid penetration by competitors at the point of sale and even develop strategic customers, companies end up applying a series of commercial initiatives to achieve these objectives. However, in certain cases, all this effort does not bring the expected financial return. Therefore, it is essential to quantify these values to understand whether these actions should be maintained or not.
If a scenario is identified where the return does not exceed the investment made, the company needs to develop other ways to leverage the volume on that customer, whether from a type of service or mix of differentiated products or other actions that enable their maintenance in the company's portfolio.
An interesting point to be noted is that, although most of the studies carried out show that companies have customers that generate losses, the scenario of eliminating these implies reallocating fixed costs, which ends up reducing the profit margin obtained from those that are profitable. According to Kaplan (2002), the fact that a customer is not profitable does not mean that he should be eliminated or impelled to accept a negotiation that reduces his level of satisfaction.
An automated tool can carry out this analysis through various simulations where unprofitable customers are removed and the new profitability in the new scenario is calculated.
This fact shows that, although this methodology for analyzing customer profitability is an excellent management tool, it should always be accompanied by a more complete analysis, which takes into account not only direct factors contributing to the margin, but also indirect factors and other definitions. such as market presence, brand positioning or investment in new channels, among others. Some of the factors that may interfere with the decision to keep or not a client in the portfolio:
- New or developing customers, who have purchase potential and future profitability;
- Customers that provide qualitative learning benefits, as the company learns how to tap into a new market, for example;
- Customers who are recognized as market leaders and who are fundamental to consolidate a positioning strategy;
- Customers who account for a large part of the market share of the company and that serve as leverage for new customers or business.
Finally, all decisions and plans must be well grounded and aligned among the entire leadership so that the company works together to achieve the same goals. Having well defined those responsible for maintaining the process and for delivering the proposed actions is crucial for the success of the process.
CONCLUSIONS
Customer profitability analysis is an indispensable tool for companies that have an extensive portfolio, in several channels, and with a large portfolio of products. The result of this process provides valuable visibility and support for decision-making, both operational and strategic.
This analysis must be seen as a process of continuous improvement, that is, its stages must be carried out according to the defined periodicity, always raising at the end of each cycle the lessons learned and opportunities so that the process never lags and the company is able to respond their main questions.
The calculation of the profitability of each of the customers is an important product of the process, but it is an intermediate product. The final objective is to analyze the results, define the strategic direction and establish action plans with defined responsible and duration.
In addition, when carrying out this analysis, it is always important to consider that the value of each customer goes beyond the profitability that this brings to the company. Non-profit customers can be of value when analyzing the expected return for the future and/or returns generated through referrals from these to other customers, for example.
It must be recognized today that companies can earn greater profits through the knowledge that different groups of customers have behaviors, desires and responses to marketing efforts. marketing completely different from each other. It is not necessary to serve everyone the same way – many customers cost too much to serve and have low potential to become profitable even in the long term.
Understanding the needs of customers from the point of view of products and services together with the understanding of the costs, limitations and flexibilities of their own productive, logistical and commercial operations are critical factors for companies to outline robust and reliable strategies for growth and success in their markets.
BIBLIOGRAPHIC REFERENCES
ELIAS, N.; HILL, D. Customer Profitability Management. Institute of Management Accountants, 2010.
GUERREIRO, R.; MERSCHMANN, EVV; BIO, SR Measuring cost to serve and customer profitability analysis: an application in the food industry in Brazil. R. Adm. Electronics, São Paulo, v.1, n.2, art.6, Jul./Dec. 2008.
KAPLAN; ROBERT, S.; NARAYANAN, VG Customer Profitability Measurement and Management. Harvard Business School Publishing Corporation, May 2001.
EM van Raaij et al. The implementation of customer profitability analysis: A case study. Industrial Marketing Management, 2003.
VICHROSKI, TSF; PFITSCHER, ED; GALLON, AV; RICHARTZ, F. The real value of the customer in the CRM process and Accounting: a case study in a company in the supermarket retail sector. REGE, São Paulo – SP, Brazil, v. 17, no. 4, p. 471-488, Oct./Dec. 2010.
