CH6 - Assessing customer profitability

Monday, June 10, 2013

4:14 PM

    Important Background

    • Organization's expenses also include MSDA expenses
      • Marketing, selling, distribution, and administration
    • This chapter deals with how to extend activity-based costing to trace MSDA expenses directly to customer orders and individual customers



    Important Characteristics of customers

    Machine generated alternative text: HIGH COST-TO-SERVE CUSTOMERS
. Order custom products
. Small order quantities
. Unpredictable order arrivals
. Customized delivery
. Change delivery requirements
. Manual processing; high order error rates
• Large amounts of pre-sales support
(marketing, technical, and sales resources)
. Large amounts of post-sales support
(installation, training, warranty, field service)
. Pay slowly (have high accounts receivable
from customer)
. Order standard products
. High order quantifies
. Predictable order arrivals
. Standard delivery
. No changes in delivery requirements
. Electronic processing (ED!) with zero
• Little to no pre-sales support (standard
pricing and ordering)
• No post-sales support
. Pay on time (low accounts receivable)



    Whale curve

    The 80-20 Rule

    • The top 20% of the most profitable product generate 80% of the total value
    • The lower 40% account for 1% of the total value


    Machine generated alternative text: 20% most profitable 20% least
generate 180% of \ Operating Profit Profile profitable lose 80%
profits \ ,, of net profits
200% T ð 
_____________ — — —  ,‘
120% , ,
1 ° 7 cTNEo E
. . ,
40% 4 t 4 4 4 ,
0% ____________
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Cumulative percentage of customers, ranked from most-to-least profabIe



    Important Construction of a Whale curve


    • Start with 2-column table with ID in column A and profit/loss in column B.
    • Sort the customers by most profitable to least profitable.
    • Calculate cumulative profit
    • Create a chart



    Class notes:

    • Need both financial and non-financial measures
    • Extend ABC to trace MSDA expenses directly to customers to evaluate costs of customer satisfaction, etc
    • Quantify customer satisfaction, loyalty, willingness to recommend - serves as leading indicators of future revenue and performance


    Opportunity to identify unprofitable customers

    • Transform them
      • Into profitable ones. How?
        • Page 226
      • "fire them"
        • Force them to sale alternate suppliers



    Problem 1



    Machine generated alternative text: LO 1,2,5 6-26 Customer profitability A credit card company has classified its customers
into the following types for customer profitability analysis:
1. Applies for credit card in response to a low introductory interest rate; transfers balance to
new account, but when the low introductory rate expires, the customer transfers the balance
to an account with a different credit card company that has offered a low introductory rate.
2. Charges a large dollar volume of purchases; pays balance in full and on time each month.
3. Carries a high balance; pays only the minimum required payment but pays regularly with
occasional late payment.
4. Carries a high balance; pays at least the minimum required payment but does not pay in full
and always pays on time.
5. Carries a low balance; pays at least the minimum required payment but does not pay in full
and always pays on time.
6. Does not use the account but does not close the account.
The following facts pertain to the credit card company’s operations:
. Merchants pay the credit card company a percentage of the dollar sales on each credit
card transaction.
. Customers pay no interest on charges for purchases if the balance is paid in full and on time
each month.
. The credit card company charges a late fee if the customer’s payment is late.
. The credit card company incurs costs to send statements to inactive customers.
Requ IL-d
Given the preceding information, which customer types would you expect to be the most desirable
or profitable, the next most profitable, and so on for the credit card company on a long-term basis?
Explain your ranking.









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