Are you making profits on all your customers? If you listen to Kaplan and Narayanan (2001)¹ you might be wailing about your Whale Curve of customer profitability.
In last semester’s Accounting 321 paper “Strategic Management Accounting” the syllabus covered Activity Based Costing (ABC) and Customer Relationship Management (CRM) in relation to Customer Profitability Analysis, but something relating to all of these which I found quite interesting is the Whale Curve of customer profitability.
If your organisation implements ABC and CRM, not only will you be able to allocate your costs to your cost drivers, but also to each of your individual customers. Kaplan and Narayanan (2001) bring the 20/80 rule to a new level, where they suggest that by performing a whale curve analysis, you may find the most profitable 20% of your customers bring in between 150% and 300% of your total profits.
Surely that can’t be, because your profits can never be more than your profits! They continue that the middle 70% of customers are generally break-even, while you will lose money on the last 10% – the losses on these last customers bring profits back to the 100% level. You can see this pattern on the graph below.
What now? Well, if your CRM software can tell you which customers you are making the most money on, you can focus your efforts to retain them as customers. You can also focus your efforts on the profit-losing customers, to find out why they are losing money. Are they on the wrong products? Do they pay late? Are you charging them too little? Knowing what makes them unprofitable allow you to make decisions to manage these unprofitable customers to profitability – and if this can’t be done, perhaps you need to consider dropping them as customers.
But bare in mind that CRM isn’t a one-stop-shop to making your customers profitable. CRM is a tool in the Management Accountant’s toolset, which works alongside ABC, ABM, Activity Based Pricing, and a few other concepts, to help your organisation gain competitive advantage.
Anyone keen to update Wikipedia?
1. Kaplan, R.S., and V.G. Narayanan, 2001. “Measuring and managing customer profitability”, Journal of Cost Management, September/October: 5-15