Look at any high street retail chain and you will be amazed by the sheer size of their product ranges or number of customers. But what’s more important, is that not all the products that we see everyday stacked up the shelves and not all the customers we see walk through those doors contribute meaningfully to the overall business profit.
According to the 80/20 principle, also known as the Pareto principle, only 20% of products/services that business provides are responsible for generating over 80% of the total revenues and profits. The same applies to customers as well. So does this mean that all the customers and products not within the 20% league should be neglected? The answer is found within customer and product profitability analysis.
Instead of just using guesswork to decide the range of products or services to offer or decide on which group or class of customers to serve, businesses can employ the use of Customer and Product Profitability (CPP) analysis to gain invaluable insights to aid decision making and improve performance.
1. CPP helps assign the cost and revenues to different products and customers helping identify the profitable and loss making ones.
2. CPP helps in retaining customers as programs are put in place to retain the most profitable ones hence resulting in customer satisfaction and loyalty.
3. CPP helps analyse the key revenue and cost drivers resulting in better decision making thus moving away from focus on only revenues and volume figures.
4. CPP helps identify areas where process improvements are required resulting in better cost management.
5. CPP helps formulate different pricing techniques for different products and customers.
6. CPP helps in reducing waste as the production team focus on the production of profitable products and sales team focus only on profitable customers.
7. Decisions can be made on whether to develop or neglect the loss making customers.