The main aim of a business is to earn profits. What is profitability analysis a company has to attract and retain those customers who are profitable.
This principle recently received a modification from Mr Sherdan who is a known marketing analyst. This is because they too have a cost consideration. The smaller customers on the other hand do not require too much service, they do not get much discounts and they pay in full. Thus the question is, What makes a profitable customer? A profitable customer is a person, household, or company that over time yields a revenue stream that exceeds by an acceptable amount the company’s cost stream of attracting, selling, and servicing that customer. Although customer satisfaction is measured in most companies, measuring individual customer profitability is not a known practice.
This equation helps calculate the profitability per product and per customer. The customer profitability analysis is bases on activity based costing and helps in calculating the revenue coming from customers while at the same time removing all costs from it thereby calculating the actual profitability per customer. To read in detail about customer profitability analysis click here. The CPA is a very important tool for profitability analysis and is frequently used.
G have a wide variety of product portfolio. So what would be their benefit per customer per product? To calculate this, the customer product profitability analysis can be used. To read more about it click here. Companies don’t need to produce products with high value itself, but also products which are competitive in the market because of their pricing. Cost leadership is one of the leading sustainable competitive advantages a firm can have. Profitability of the firm also depends on its ability to continuously improve its products and processes.
TQM involves everyone and the concept believes that with involvement of the top management, the workforce, suppliers and even customers, the overall output of the firm can be increased and thus the firm will always meet customers expectations thereby thoroughly satisfying them and therefore increasing the overall profitability of the firm. Thus profitability analysis leads to the firm discovering the areas where it is profitable and where it is not. It can help the firm decide where it can lower the cost and where it can increase value. Thus in the end, we come to the point mentioned at the start of the article. The motive of a business is to earn profits and profitability analysis helps the firm achieve the same aim. I am currently in grade 12 and I am busy with a task on the analysis of profitability. I have used 4 ratios pertaining to profit.