Today's customer has high expectations - they know exactly what they want and how they want it. Moreover, they're not scared to take it from whichever company offers the best deal. They're no longer attached loyally to a single brand. After all, the competition out there is so stiff, there'll always be a better product or a more generous deal available. This has put businesses under tremendous pressure to maintain their customer bases while keeping customer acquisition and retention costs as low as possible. One of the best ways to analyze this phenomenon is through the customer profitability metric.
With customer-centricity becoming the core of all businesses, companies must identify their most profitable customers to serve them better. On the other hand, it is also important to incrementally improve the profitability of loss-making customers. Neither of these will be possible without a thorough customer profitability analysis. So, the question remains, what exactly is customer profitability and how can this data be harnessed to improve wholesale distribution business?
WHAT IS CUSTOMER PROFITABILITY?
Customer profitability can be defined as the profit earned by the organization from each customer segment. This entails totaling the revenues earned from that particular segment and deducting the costs required to acquire and maintain the customer segment's loyalty. Customer profitability can often lead to unexpected conclusions - not all customers add value to the company's bottom line. Identifying the most profitable customer relationships can help businesses refocus their efforts in the right direction. Here are a few benefits of conducting a customer profitability analysis regularly.
- It can help assign a concrete monetary value to each customer segment, separating the wheat (higher profit customers) from the chaff (lower profit customers).
- It can help create loyalty programs for the most profitable customers, thus, increasing customer satisfaction and retention.
- It can help identify key investment opportunities in marketing to acquire more customers from the most profitable segment.
- It can help analyze key revenue and cost drivers to bolster profit margins.
- It can help plan out effective pricing strategies for different customer segments based on their purchasing habits.
HOW TO MEASURE CUSTOMER PROFITABILITY?
Customer profitability analysis isn't just a cost-saving metric. It's much more than that. The key lies in gleaning actionable insights from the data, insights that can drive data-based business decisions.
The first step is to collect the right data sets to analyze. Before you begin, identify all the channels and touchpoints that your business maintains with the customer. Then attach the costs related to maintaining each channel. This can include social media costs, customer service costs, marketing costs, and shipping costs amongst other verticals. It's necessary to maintain transparency while allocating overhead, sales, and support costs to each channel.
The second step is to segment your customer base into homogenous groups. They can be divided into groups based on their backgrounds and behavior. The third step is to understand how much each segment costs your company. It is generally easier to identify the revenue generated by each customer but how much that customer costs the firm is harder to pinpoint. That's why it's critical to define the right metrics when you're analyzing customer profitability.
Once all the numbers have been crunched together, all you need to do is scrutinize the data to identify the relevant insights.
HOW TO USE CUSTOMER PROFITABILITY TO BOOST WHOLESALE DISTRIBUTION MARGINS?
- Create a modified pricing strategy - Your pricing strategy can help you improve customer profitability by making your product more affordable. But this doesn't always mean lowering the prices of your production line. By studying the collected data, you can associate customers and their buying habits with changes in price. The price elasticity of consumers can change based on their segments. Aligning your pricing strategy with this data will ensure that you price your product according to the customer's expectations.
- Drive higher sales from your most profitable segment – Most distributors ultimately find that the easiest and the cheapest way to increase profits is by working within your existing customer base and not by chasing new clients. Use the data to understand the purchasing habits of your customers. What items do they usually buy together? Once you've answered this question, you'll be able to create a system of strategic upselling and cross-selling recommendations that can be bundled together.
- Use the data to drive changes in your organization - The collected data can be used to make concrete decisions based on hard facts. Each data-centric decision will enable you to further increase customer profitability and profit margins. For instance, the data can tell you which customers’ profitability might justify a higher level of service, such as a dedicated account manager. It can also reveal insights about altering the behavior of your customers with low profitability, possibly by cross-selling additional products in a targeted manner to improve margin.
Customer profitability analysis is a crucial metric that every organization needs to track to maintain its competitive edge. Not only can it help with reducing fixed and variable costs, but it can also improve customer retention, help create a pricing strategy, and identify profitable customer segments. After all, not every customer is right for your business.