Have you ever wondered if every customer your business serves generates a profit? Operational difficulties in meeting the needs of some customers can considerably outweigh the return they bring. We at the ILOS often bring this topic up for debate, as in the articles in the Caio and Marcus, due to its importance in increasing the profitability of companies and its lack of visibility, since it is not something intuitive.
Figure 1 – Accumulated earnings chart (whale curve)
Source: ILOS
Customers usually have exclusive and often difficult to standardize service preferences, which, due to pressure from the commercial area, are normally met. These preferences up to a certain limit can be absorbed by the company that still generate profitable transactions. Some others may generate transactions where costs equal revenue, giving rise to customers with zero (or close to zero) profitability. But the worst case scenario is when transaction costs exceed revenues, generating margin-consuming customers. These three situations can be seen in figure 1, through the accumulated profit graph, also known as the “whale curve”.
The whole problem lies in the fact that this separation of profitability from customers is not trivial. Costs associated with customer service are both logistical, commercial and administrative in nature, which makes calculating the final cost of serving customers complex. It is not uncommon to observe customers who require their own IT system to process their order, or who have an extremely restricted receipt window. All of these factors should be factored into your cost-to-serve analysis and consequently your profitability ranking.
In any case, customer abandonment (or contract renegotiation) should be a daily reality for companies. However, unavailability of information and unbridled searches for sales goals keep managers away from this difficult and counterintuitive, but necessary, reality. An effort spent on the correct allocation of sales in the company's portfolio is certainly more valuable than the achievement of revenue targets conceived in an unstructured way.
And does your company know how to identify which customers are profitable and which generate losses?
