Customers are the pillars holding the growth and development of your business. Approximately 89% of customers are likely to come back and make another purchase when you offer them a remarkable experience. Customer profitability analysis enables you to segment your audience into different categories based on their profit contribution.
Also, this information is vital in helping you to optimize your marketing strategies, customer service, operation costs, and many others. Even though many people haven’t uncovered this strategy’s impact on their business growth, it’s high time that marketers reconsider it. Understanding every customer’s contribution to your business’s growth is vital.
This guide to customer profitability analysis is dedicated to helping you understand how you can transform your brand using this strategy. Let’s get into the details and elaborate more about customer profitability analysis and everything it involves!
What is Customer Probably Profitability Analysis?
Contrary to what many people think, customer profitability is far from the average gross or net margin generated on a transaction basis. Customer Profitability refers to all the profit generated across all the touchpoints that the customers have with your business brand.
This includes things such as customer service, returns, customer fulfillment, contacts, and many others. Customer profitability analysis is the process of uncovering all these profits made by the business owner from their respective customers. Doing this lets you learn whether you are making profits or losses.
Once the process is done, you will learn more about the areas that require changes to increase your profit. The primary goal of doing this is to evaluate the progress of your business based on the returns you are making.
Importance of Measuring Customer Profitability
Making profits is the goal of every business across all industries. Even though many factors affect how attainable and sustainable it can be, the end goal is to ensure that you are making good returns from your business operations. Even though measuring customer profitability is essential, the process can be daunting.
When you build a framework to measure customer profitability, it will be easier to measure your business’s progress. Once everything is up and running, you will easily detect whether specific customers are helping you make money or lose money. You may find out that the group of customers you thought was making money it’s contributing to your losses.
As a result, you will need to change your strategy and focus on places that give you remarkable returns. Examples of this may include expanding certain services that customers respond well to, like Farmers auto insurance developing online and app-based quote tools. You may wonder how some customers are costing you money; you need to trickle down to evaluating your servicing cost. Evaluate if you have any customers that call for customer service frequently.
Once you find the answer, you will begin uncovering the segments through customer profitability analysis. Also, you need to check if you have any customers with special needs for fulfillment requiring more labor than usual. Check in the customers that require free shipping and free returns or any other group of customers that demands lots of services.
By considering these aspects, you will find it pretty simple to understand the profit you are making from every group of customers. This will help you in making reliable decisions moving forward that will contribute to the continued development of your business.
The Process of Customer Profitability Analysis
The customer profitability analysis is a detailed process that needs you to pass through different steps to get the job done. It also involves data visualization, which helps you make reliable decisions that impact the success of your business. Check this out!
Define Your Customer Cost
Before measuring your customer profitability, you need to understand your business costs and expenses. Also, identify all the areas where customers can easily interact with your company. Note that this should be something beyond the actual product or service cost, depending on what they purchase.
Evaluate your marketing cost, the customer service contact expenses, and the social media contact cost. Check on the shipping cost, especially if you facilitate the return shipping and other return costs, such as restocking or refurbishing. After you have identified all the modes the customers can get in contact with and interact with your business, you can now get to the next step.
Define Your Customer Groups
The next critical step is to discuss customer profitability segmentation. Sine developed businesses have perfectly defined customer segments that mainly depend on the size of the business. If you do not have well-defined customer groups, it’s time to define them. Evaluate the type of customers you have and their purchasing power.
Even if you need empirical evidence to help define your customer segments, your products and services can help you determine these groups. Note that developing customer personas is critical for the well-being of your business. However, this is only possible if you understand your ideal customers perfectly.
You can start creating your customer person depending on the user data at your disposal or choose any other crucial information within your access. Remember that you are free to use any of your preferred strategies to learn more about your customers and offer them exactly what they want.
Find the Data
This is the point where you need to search for the details. Besides, this is the part that needs lots of effort and collaboration among your team members. The first thing is to evaluate whether you have data or not. Also, if you have data, evaluate whether it’s tracked or easily accessible. You will most likely realize that you have data, although it’s lambed together.
At this point, you need to involve a lot of science in the process to help you get the job done. Also, you can make proper use of data visualization such as flow charts, trend charts, and Sankey charts to uncover all the hidden data insights you need during decision-making. Once you have the data, ensure that you pair every element with its specific customer group.
Improving Customer Profitability
Improving customer profitability is an ongoing process that requires your continued efforts. The first thing to do is to maximize on some of the most profitable customer groups. Evaluate the proportion of these groups compared to the entire business. Take note of the average resources budget that is required to grow the customer group.
In addition, you can launch a VIP program that will be dedicated to encouraging more spending among your high-value customers. However, this does not mean that you should neglect other customer segments. Identify the areas that need improvement in every customer segment to enhance the up-selling of your services and products.
Ensure that you add details in all the sales processes to guide your customers on products that can best satisfy their respective needs. Implement specific policies that will aid in governing costs. This will help you to maintain a balance between the customer spent and the number of sales recorded. Once this balance is created, it becomes easier to skyrocket your profitability.
Bottom Line
A recent market study has revealed that 78% of consumers can easily turn out to repeat customers if the customer service is exceptional. This indicates that creating a better customer experience can help you increase the profitability of your business. Note that customer profitability goes beyond the revenues customers bring to your business.
It’s about taking your time and evaluating the customer journey or every customer visiting your business. After collecting all this data, you can easily use it to make meaningful conclusions that will greatly contribute to the continued success of your business. Note that you can easily refresh this data on continued occasions after a specific period. This will enable you to collect accurate values throughout the period.
