CIMA P2 Syllabus A. Managing The Costs Of Creating Value - Customer Profitability Analysis - Notes ^{9 / 11}

CPA is an ABM technique using ABC principles to identify the most profitable customers.

Customers are categorised in different groups with different activity profile.

This categorisation then helps in marketing to be more directed at attracting and retaining customers.

An example:

Let's say we have two customers, A and B, who have generated similar revenues for our business over the past year. 

We might think these customers are of equal value to our business, but A has been a customer for years, refers friends, pays electronically and demands little in the way of extra attention. 

B, on the other hand, has recently been reacquired for the third time in five years. 

He buys our lowest margin items and requires a lot of customer care. 

So are A and B generating similar  returns?

Probably not...

Costs affecting customers profitability

Customers profitability can vary due to various overhead costs related to the transaction such as:

• Discounts and allowances

• Distribution costs

• Quality control

• Emergency delivery etc.

Examples of cost drivers:

• Number of orders

• Number of deliveries

• Number of sales visits

• Number of km per delivery (customer's location)

• Number of rush deliveries etc.

Pareto analysis is perhaps more popularly known as the “80/20 rule”, whereby a large number of problems can be explained by a small number of causes (in the rough ratio of 80:20).

Application to CPA

It is common that

• 20% of one’s clients accounting for 80% of the profit

• 80% of customer complaints arising from 20% of the products or services etc.