Customer profitability is the gross profit associated with a customer or group of customers.
CalculationCustomer profitability is essentially a contribution margin or gross profit broken down by customer. It is calculated using variable costs. customer profit = revenue - variable costsIn some cases, models may allocate fixed costs into the calculation of customer profit. Attributing fixed costs to customers can be complex and may require a variety of company specific interpretations.customer profit = revenue - variable costs - fixed costs attributable to customer
ValueCustomer profitability is often used to form marketing, sales and customer service strategies and tactical actions. Awareness regarding which accounts are critical to the bottom line can aid in customer retention efforts. Customers with low or negative profitability may be an opportunity for upselling. In many cases, customers with low profitability can be improved to have a reasonable customer lifetime value.
ExampleA data center in a strategic location for colocation services is running out of power and space. They need to ask some customers to move to a secondary location nearby in order to preserve the stability of services to manage continued growth. The move impacts customers with downtime and the secondary location is in a slightly less ideal location. In other words, the migration may result in account cancellations and issues with customer satisfaction. The firm performs a customer profitability analysis and asks their least profitable accounts if they are willing to move.
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