Customer profitability score

Customer delight is often treated as an unquestioned corporate objective. Yet satisfaction creates economic value only when the revenue from a relationship exceeds the complete cost of acquiring, serving and retaining that customer. The customer profitability score keeps that commercial reality visible.

When to use it

• Answer the key performance question: “To what extent are we generating profits from our customers?”
• Assess this KPI within the Customer perspective.
• Plan data collection, formula use, reporting frequency, and data-source requirements for this KPI.
• Compare results against the targets, benchmarks, examples, or trend guidance available for this KPI.

Origins

Customer-profitability analysis grew out of direct marketing, database marketing and activity-based costing. During the 1980s, activity-based costing connected overhead with the activities and cost drivers that consumed it; applying the same logic to customers revealed that accounts producing equal revenue could generate very different profits. A profitability “score” is a managerial summary of that analysis, so its contribution, service-cost, acquisition-cost and time-horizon assumptions must remain explicit.

What it is

Perspective: Customer perspective.

Key performance question: To what extent are we generating profits from our customers?

Customers must buy for an organisation to prosper, but not every sale creates value. Some customers contribute strongly to profit, while others cost more to acquire, deliver to and support than the revenue they generate.

An indiscriminate pursuit of delight can therefore become loss-making. Extra features, exceptions and service may please a customer while the supplier absorbs costs that its price never recovers.

This inequality has been documented for decades. One analysis of a US insurance company found that 15–20% of customers generated 100% or more of profit. The most profitable customers produced 130% of annual profit, the middle 55% broke even, and the least profitable 5% created losses equal to 30% of annual profit.

The score prevents customer enthusiasm from obscuring the organisation’s economic objective: earning a sustainable return from the products and services it sells.

How to use it

Measurement

Data collection method

Combine marketing and accounting records with the cost allocations produced by activity-based costing.