Analysing a company's profitability can be complex, exhausting and controversial. But, it must be done. Jobs, futures, bonuses, you name it, all depend on a business being able to make and measure its profit.

The most common way to measure profit is at company, business unit, product or channel levels. However, there is another way to monitor (and improve) margins, and that is at individual customer level.

Customer profitability analysis (CPA) doesn't receive as much attention as other analysis methodologies. Yet, for many B2B industry sectors, such as logistics & supply chain, with a relatively small number of high revenue generating customers, CPA provides an alternative view of a company's profit drivers. Critically, it also offers new insights into how the bottom line can be improved.

CPA demonstrates that each unit of revenue doesn't contribute equally to profit. Profitability is not merely dependent on the revenue generated by a particular customer.

The cost to serve them relative to the price being charged must also be reviewed. Companies such as DHL recognise this phenomenon and have installed a data analytics solution which identifies the most unprofitable customers and assesses various courses of corrective action.

As a general rule of thumb CPA indicates that the most profitable 20% of customer contribute between 150-300% of total profits, 60-70% of customers contribute nothing while the most unprofitable 10-20% can cost between 50-200% of total company profits.

Plotting individual customer profitability on a 'Whale Curve' (or something similar) shines a light on customers that are costing them money.

Customer Profitability Analysis is not easy and gets criticised for being 'retrospective' in its approach. However, its insights - when followed up with corrective action, will add an extra boost to the bottom line.

Photo by micheile henderson on Unsplash