Customers are one of the most important assets of businesses, they are the ones who allow them to obtain income. Nevertheless, are they all the same? Do they all offer the same revenues? The reality is no. Some customers are more profitable than others and that is why it is important for you to know how to calculate customer profitability if you want to continue being competitive in your area.
Studying customer profitability will allow you to improve your communication, marketing, and sales strategy. That is why this is one of the main formulas used by companies to segment their clients and with it increase sales. In fact, an ERP like NetSuite allows you to calculate this without any problems.
How to calculate customer profitability?
First of all it is important that you know what it means for a customer to be profitable. According to Philip Kotler: A profitable customer is a person, or company that yields a revenue stream that exceeds the company’s cost stream. In other words, customer profitability is based on the benefits that the company receives minus the cost of supporting the customer for a given period of time. A way of calculating this, is by creating a ranking of your most profitable customers. This is achieved by using the Customer Profitability Score (CPS). An indicator that tells you how profitable the customer is in a determined period.
To calculate this you must apply the following formula:
CPS= Sum (Revenues – Expenses) / Sum (Expenses)
It is probable that this indicator will allow you to see which customers are not as profitable or which are costing the company money. Likewise, you must evaluate the case of customers that, even though they buy large amounts of products or invest in many services of the company, they also demand a lot for the profits they generate. Which means that in the end they are not as profitable as you would think. These are what you call “high maintenance” customers.
But it is important that you know that customer profitability also depends on other factors. One of them is the value offered by some clients or the business potential in the medium and long term. According to some studies, the benefit per customer increases as the duration of the business relationship also increases.
Classification of customers according to their profitability
Once you know how to calculate customer profitability and you have that data, you can make a classification. They can be divided in three major groups catalogued as type A, B and C. A corresponds to customers who account for 60% or 70% of the company’s profits; B are those that account between 30% and 20%; and C those that contribute between 5% and 10% of the profits.
A tool that will help you obtain the data that you need to calculate customer profitability is NetSuite ERP. This solution based on the cloud helps to optimize operational streams to help companies grow.
One of the characteristics that it is worth highlighting about this software is the possibility of adding a CRM module. Thanks to this the company can create profiles for their regular customers and in them include relevant information such as personal data, purchasing frequency, retention among other things.
If you are interested in having this tool, in Fusionworks we can help you implement it in your business. We are specialists in this and other IT solutions. Call us!