USA Customer Profitability Analysis

[Peter Holt]

For a project, we have to list customer behaviors causing the profitability of segments, decisions to maintain and increase profitability of segments and provide advise how to improve the customer profitability model (it is just a basic model without weighted effort). The only information we are given is the segments' net sales (sales minus selling bonuses and sales account managers' salaries), COGS and expenses included in cost-to-serve.

Large Customers have a positive profit margin (and have a few individual clients located close to the company), Medium Customers have a slightly lower margin (and a medium number of individual customers located at a medium distance from the company) and Small Customers have a small negative margin (and many individual customers located far away from the company).


So far I have got:

For behaviors - Location and amount of individual clients leads to different (as a % of net sales) total delivery costs and number of orders and cartons packed (therefore different order processing and packing costs).

For decisions - Automate, Get rid of selling bonuses and instead have a smaller rise in salary for all sales individuals and Reduce sales account managers' salaries and instead have remote working, flexible hours and anti-discrimination policies.

For model improvements - Add weighted effort.


Can you think of anything else and/or should I change/remove anything?

 

[Dave In Capital]

This starts off as a marketing analysis then shifts to a discussion of cost reduction. I think the first step is to distinguish between the two.

Customer behaviors contributing to segment profitability relates to marketing. Marketing is of course a vastly complex subject matter. But I'll at minimum note the ubiquitous SWOT analysis, which is used to gauge a firm's market position.

The provided inputs like cogs, cost of sales, etc., leave a narrow field of options. The instinctive solution with so few factors is to simply cut costs.

But, cutting costs won't always translate to increased market share. Economists and market analysts tend to agree there is an over-emphasis on short-term goals in profit models. Whereas, long-term planning assesses overall trends in product design, branding, and sustainability. Too much cutting could create a "race to the bottom" of decreased quality that undermines the firm's long-term viability. In extreme cases this is known as the "suck and dump" business model.

Increase investment in R&D. Improve employee retention. Create a 2-way feedback loop between line level staff and executive management. Develop a survey strategy to gain insight into customer preferences. Consider that Kaizen and ISO 9000 emphasize open communication and constructive feedback. IBM in its heyday was known to provide up to 4 years of training for staff. It was the global leader in innovation.

I recommend applying marginal analysis when estimating the return on profit centers. That is, separate fixed from variable costs to determine which sized customer is contributing more to marginal revenue after accounting for sunk costs.

For example, consider the economies of scale realized from small customers. While their per unit profitability might be small, in aggregate they might comprise the majority of revenue. I think we would all agree fast food is more profitable than fine dining when accounting for aggregate returns. The nickel and dime margins on $5 menus can add up, and there is empirical data pointing to the success of eateries that pay line level employees upwards of $20 / hr.