While it’s important to attract new customers, it’s equally important to see if they generate profit. Today, we look at customer profitability score and how it can help your business get ahead. Customers contribute differing amounts and value throughout your purchasing cycle. Customers who make positive contributions to your company’s profit have a high CPS. These are the customers you rely on, and it’s important to differentiate them from your none-value-adding customers. Failing to do so can lead to overspending and poor decision-making, as you will continue to target customers who simply aren’t interested. By identifying and retaining the right customers, you can increase profit. Read on and learn you can use this essential KPI with Six Sigma!
Calculate Your Customer Profitability Score
To calculate your customer profitability score, simply subtract the cost of supporting a customer from the revenues they generate for you. CPS is a highly useful decision-making tool, one that is pivotal when customer-company value exchanges are in flux. The company-customer relationship is often volatile, fluctuating in response to new information. Customers don’t always value the same things, with changing needs affecting profitability. Monitoring your value stream with Six Sigma provides insight into how you can manage changes to CPS. Moreover, it can also shed light on the value of new business versus the cost of lost business. Using Six Sigma techniques like root cause analysis, affinity diagrams, DMAIC, and hypothesis testing, you can do the following:
- Select customers to target that would benefit the company.
- Separate customers to retain from customers to drop.
- Decide which customers to cross-sell, plus what products to sell to them.
- Set prices for products and services.
- Set sales compensation rates and reward program entitlements.
- Recognize customer behaviors that generate or destroy value.
Multiple types of value determine customer profitability. If you are to make the most of CPS, we recommend getting to know each one.
Historical value derives from long-term company-customer relationships. It is most useful when ranking your customers regarding value, plus when selecting targeted marketing groups. Similarly, historical value also impacts on your assessment of pricing and budgeting.
Current value comes from short periods of time, usually the current or previous month, as this coincides with reporting cycles. It tends to be highly volatile, as cyclical relationship factors don’t always register within such specific time frames. The benefit of current value is that it underscores the effects of changes in the customer relationship compared to previous values.
Present value looks to the future, specifically at revenue and cost streams of current customer business. It projects future revenues and costs, helping to model the impact of price and service decisions before you implement them. Using it effectively requires patience, but the payoff is worth the effort.
Lifetime value also focuses on the future, while acknowledging projected revenue and cost streams from existing business and prospective customers. Implementing lifetime value requires insight into your customers’ repurchase behavior. Similarly, it also entails the likelihood of the customer increasing or reducing their future business with you. Lifetime value is the optimal customer value measurement and is appropriate for just about any decision-making situation. If you can use it effectively, you can maximize profit and increase customer exposure.