Understanding the Relationship Between Customers and Profitability Analysis

Knowing the kind of approach, strategy, mindset and direction to take to improve performance is always a daunting task, both for large organizations and small businesses alike. Getting to the decision to where to put money and what kind of data and analytics (such as marketing analytics) are important are essential to how successful an organization can be going forward. It’s important to focus on things that will help maximize growth and profitability. Part of the process of getting to know these things is taking a look at the relationship between the customer and profitability analysis.

These days, the customer is king. They are much more informed, much more assertive, much more discerning, and their tastes and demands change like the seasons. Gone are they days where companies largely dictated how markets more and what consumers want. Customers today KNOW what they want, and if they don’t get it with Company A, then they have no qualms going to Company B, C or wherever to fulfil that need. Brand loyalty and brand advocacy are precious luxuries in this day and age, but organizations that manage to do the right profitability analysis and customer studies often unlock the secrets not only to profitability, but also to creating loyal brand ambassadors (who often don’t need to be paid a single cent) as well as discovering new opportunities that were previously untapped.

What is profitability analysis in the first place?

Marketing 91 defines profitability analysis as an “analysis of cost and revenue of the firm which determines whether or not the firm is profiting.” TechTarget goes even further and deeper, defining probability analysis as “a component of enterprise resource planning (ERP) that allows administrators to forecast the profitability of a proposal or optimize the profitability of an existing project. Profitability analysis can anticipate sales and profit potential specific to aspects of the market such as customer age groups, geographic regions, or product types.”

In essence, profitability analysis can help an organization discover things like which customers are the least profitable (those who spend less), as well as those who really put their money where their mouth is. It’s also able to help discern which products or services generate the least amount of revenue, determine reliable sources of data an information, create an efficient and effective strategy that can respond to constantly changing customer needs, help develop better and new offerings to keep up with current market trends, as well as help provide concrete solutions to aspects of the business that don’t generate enough money, or worse, cause the company to lose money.

An integral part of this analysis is looking at the customer base and seeing, in essence, which ones work better towards helping the company meet its profitability goals. Where the larger profitability analysis looks at things in a much larger scope, customer profitability analysis looks at individual customers’ profitability profiles. It answers questions like, how much is spent servicing a particular customer’s needs, and how much a particular kind of customer can generate in terms of income for the organization in exchange for services rendered or products purchased.

UK-based business publication Business Matters highlights the importance of a customer and profitability analysis: “[The risk in] always put[ting] all your customers first, the bad ones may put you out of business or, at best, detract from your quest to provide customer service excellence to the good ones. Looking at it like this, the problem is clear cut: a business needs to know which customers to treat like kings and which can be moved onto competitors.”

For example, an energy company that sells various energy-saving devices can look at it’s profitability from residential homes and from corporate clients. Naturally, corporate clients would tend to have more purchasing power and would have bigger orders compared to residential clients. However, corporate customers would also tend to haggle down the price (which is also where pricing strategies comes into play) more when compared to residential customers. Even then, if the energy company offered a period of servicing or warranty period, it could also look at (within the corporate and residential customer classification) things like location, or the kind of set up, since those factors (among other things) would factor into the cost of servicing that warranty and ultimately affect the company’s bottom line.

Profitability analysis as a business essential

A study on profit is important. While this may sound obvious, the nuances that lie underneath that statement and the profundity of that importance is often lost on many. Profit means capital — all the expenses like overhead costs are subtracted from this. Capital means the means for that organization to invest into its future. And in an environment where customer demands change often and trends have a very short lifespan, its important for businesses to have the capacity to be able to adapt to those changes — which is only possible through capital funds.

Profitability analysis allows companies to maximize their profit, and thus also maximizes the opportunities that business can take advantage of in order to keep itself successful and relevant in a very dynamic, competitive, and vibrant market. As an article on Aderant states, “When you make a serious commitment to promote both the growth side of your business while also acknowledging the importance of managing costs, you will create a strong foundation for your firm that can weather just about any future calamity.” That is the kind of thing a profitability analysis makes possible.

Profitability analysis is especially useful and essential for growing companies. Profitability analysis help businesses identify growth opportunities; since things aren’t as stable yet as compared to a more established business, profitability analysis can spell the difference between shutting down and keeping afloat. In the long run, profitability analysis can help propel that business into the future, and allow that business to grow the potential that allowed it to exist in the first place.

Profitability analysis helps decision-makers see a more concrete picture of the company as a whole, allowing them in turn, to create the right growth strategy. Not being or being poorly aware of weaknesses in a business’ operations can cause critical failure, unless the company’s leadership knows when and where to trigger growth. Profitability analysis essentially gives company leadership the capability to solidify the company’s state before changing things up with any growth initiatives.

>> Recommended Reading: How to Succeed as a Small Business Owner in the Google Age

4 essentials to creating a profitability + customer analysis

Suffice to say, there’s no formula for creating a profitability and customer analysis strategy. Sure, there’s the math, which is constant, but before you even get to that there are so many other things to consider. So many other factors need to be looked at and understood before the math can even be applied. Geography, industry and market circumstances, customer behavior and trends — these all differ and are relative to the kind of business you have. But here are a few essentials you need to think about when developing a profitability and customer analysis.

1. Look to understand the customer

When you want to look at the customer profitability, you naturally need to invest in understanding your customers first. Utilizing big data and other tools will prove indispensable (more on tools later) in being able to have a better understanding of customers. It’s also important to look at the customer experience and putting yourself in their shoes. By identifying both the strong and weak links in the whole customer experience, you will be able to have a more solid image of the kind of customers you have and how each kind of customer contributes to the success of the company and what their impact is to the bottom line.

2. Organize the insights you collect

It’s one thing to have data, it’s another thing to have data you can use. It’s important to develop customer profiles because it potentially points to the kinds of services or products a certain group or demographic would prefer. Organizing customer insights and profitability analysis results also allow you to anticipate customer behavior and responses, such as what kind of incidents or experiences would prompt a customer to switch to the competition. Using this knowledge, leaders are more informed and can thus create the appropriate initiatives to better meet customer interests and possibly anticipate new trends that can be capitalized on.

3. Implement the right way

Many things look good on paper, but things can go awry fast when the time comes for implementation. Profitability analysis results are helpful, but the initiatives you generate out of them are for naught if you fail to implement properly. To this end, it is important that you have open channels of communication throughout the organization and engage ALL the stakeholders. It’s important to call for a change in mindset all throughout the organization and impress on all its members the rationale and importance of these new initiatives. This kind of approach also helps the organization in a much broader sense, since it promotes a greater sense of unity and belongingness among all the people in the company.

4. Employ the right tools for the job

Proper profitability analysis needs the proper tools. Investing in the right technologies and solutions is the only way to go if you want to successfully reap the fruits of a profitability analysis. One good example here is Runrun.it, which provides a large number of analytics and data tools that any company or business can utilize and incorporate into their operations seamlessly.

Take the Task Tracker system — it has customizable dashboards that show how individuals, groups or teams are doing in a particular task. Are they struggling? What parts of the task are complete? The software is capable of answering this and more; such as how initiatives (such as the ones prompted by a profitability analysis) are faring. The tracker is also useful since you will be able to see which kinds or projects from which client take the most time to finish, thus giving you a much better picture of how profitable a particular customer is. And that’s just the tip of the iceberg, so to speak — to see how much Runrun.it can do for you, check out the free trial here.

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