What is customer profitability?

Discovering customer profitability includes determining whether the costs associated with acquiring and maintaining a customer are greater or less than the benefits generated by the relationship.

Customer profitability is a process of determining whether the amount of resources spent to acquire and maintain a relationship with a given customer is greater or less than the benefits generated by that relationship. In the strictest sense, relationship profitability is based on the difference between the time and supply costs that are consumed by the relationship and the revenues that are generated by sales made to that customer. Other formulas also allow for indirect benefits, such as the word of mouth the customer provides and the degree to which that customer’s recommendations lead to the acquisition of additional customers.

Helpful and knowledgeable customer service departments can help businesses stay profitable.

The most common model for determining the level of customer profitability involves assessing what is known as the customer acquisition cost. That’s simply all the costs associated with sales and customer service efforts directed at that customer. Examples include direct and indirect costs such as wages and salaries for personnel who interact with the customer, the average cost of promotional materials sent to the customer, and any discounts given as incentives to open an account.

Maintaining an ongoing relationship with customers is an important aspect of customer profitability.

If the costs involved in obtaining and maintaining an ongoing relationship with the customer are fully offset by the revenues generated from sales to that customer, the relationship is considered to break even. Here, the indirect benefits of the relationship can add some degree of profitability to the customer. If the customer has recommended the business to several acquaintances who later become customers and generate revenue for the company, this intangible benefit may be enough to continue the relationship, even if there is little or no direct profitability.

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Failure to handle customer complaints can have a negative effect on customer profitability.

When the revenue generated exceeds the cost of securing and maintaining a customer relationship, customer profitability is more easily measured. Ideally, this profitability includes both tangible and intangible benefits, where the revenue stream generated is far above the account maintenance costs and the degree of customer loyalty is such that the customer routinely promotes the products offered by the company. As many companies understand, maintaining customer profitability means having a strong customer service ethic that involves handling customer complaints quickly and effectively, as well as always listening to the voice of the customer, regardless of the nature of the inquiry, comment, or worry. Failure to address customer complaints or convey to the customer that he or she is not worth the effort opens the door for competitors to step in and win the customer over, possibly never to return.

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