Identifying the most profitable customers, products and services is actually a bigger issue than most people realise. To understand profitability by customer, you need visibility of the true ‘cost to serve’, and how that may change over time. In our experience very few organisations have a strong, granular understanding of their costs to serve by customer, product or channel. This limits their ability to accurately analyse the likely impact on profitability of pricing and other changes. This is even trickier in the current environment. Businesses have not fully come to terms with different volumes, changing customer behaviours and the impact of falling prices. These factors do not affect the cost to serve equation in a linear fashion, yet if you assume that they have done, then you are unlikely to have an accurate understanding of where your profits come from.
Understanding your customers and how your customer base may have changed during recession is something that businesses really must be alert to, as the danger of a quietly shifting customer demographic is enormous. Business plans, growth projections and investments are all made on the basis of an accepted customer demographic – and knowing what else those customers are likely to buy. If the actual customer demographic – and their spending patterns and power - has shifted, then the ramifications of this are immense.
Businesses who offered ‘value’ promotions during the recession should be wary of how this may have affected the customer base; have they educated their customers to a level of value that they might not be able to maintain?
Businesses may not have the ability to spot such a shift though, as internal reporting systems are often too slow to recognise this until it is too late.