It seems rather obvious and sometimes assumed…
Customers who result in more value for a company with less efforts and/or costs are far more desirable. Something many company’s fail to do is segment the customers based on the status or level, this allows them to be treated appropriately.
Bendle et al. (2016) categorises these categories into the following 3 tiers:
Top tier customers can be rewarded but this must be done carefully to prevent any impact on their status as a top-tier customer.
Second tier customers are the second category and these customers need to be nurtured and grown which will undoubtedly take investment.
Third tier customers are undesirable and cost far more than their return in value and should not be chased by any means.
We can define Customer Profit (CP) as the ‘difference between the revenues earned from and the costs associated with the customer relationship during a specified period’ (Bendle et al. 2016).
This involves a large amount of guess work for two reasons on both sides of the equation. First, calculating the cost allocated to an individual customer is very hard to calculate but if a consistent method such as Bendle’s et al. (2016) Activity Based Costing can be applied, this will provide some useful data.
On the other side of the equation, calculating revenue is also difficult as the monetary revenue is one thing but if that customer recommends the brand to their friends this adds further value.
While theoretically, the concept of customer profit is very useful the application is very difficult and the practical uses for the concept seem to lie in the tiered status of customers to allocate resources appropriately.
References:
Bendle, NT, PW Farris, PE Pfeifer & DJ Reibstein (2016) Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance, 3rd edition. Pearson: New Jersey
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