Customer Profitability Analysis

Customer profitability analysis (CPA) is best conducted with the tools of an accounting technique called Activity-Based Costing (ABC).

The company estimates all revenue coming from the customer, less all costs. The costs should
include not only the cost of making and distributing the products and services, but also such costs as taking phone calls from the customer, travelling to visit the customer, entertainment and gifts-all the company's resources that went into serving that customer.

When this is done for each customer, it is possible to classify customers into different profit tiers: platinum customers (most profitable), gold customers (profitable), iron customers (low profitability but desirable), and lead customers (unprofitable and undesirable).

Companies must focus on building customer advantages. Then they will deliver high customer value and satisfaction, which leads to high repeat purchases and ultimately to high company profitability.