Customer profitability is a process of determining if the amount of resources expended to acquire and maintain a relationship with a given client is more or less than the benefits generated by that relationship. In the strictest sense, the profitability of the relationship is based on the difference between the costs of time and supplies that are consumed by the relationship, and the revenues that are generated by sales made to that customer. Other formulas also allow for indirect benefits such as the word of mouth that the customer provides, and to what degree the recommendations of that customer lead to the acquisition of additional customers.
The most common model for determining the level of customer profitability involves assessing what is known as customer acquisition cost. This is simply all the costs associated with the sales and customer service efforts directed at that customer. Examples would include both direct and indirect costs, such as the wages and salaries of personnel who interact with the customer, the average cost of promotional materials sent to the client, and any discounts extended as incentives to open an account.
If the costs involved in securing and maintaining an ongoing relationship with the client are offset completely by revenues generated from sales to that customer, the relationship is considered at a break even point. Here, indirect benefits of the relationship may add some degree of customer profitability. If the client has recommended the business to several acquaintances who subsequently become customers and generate revenue for the company, that intangible benefit may be enough to continue the relationship even though there is little to no profitability obtained directly.
When the revenue generated exceeds the cost of securing and maintaining a relationship with the customer, then customer profitability is more easily measured. Ideally, that profitability includes both tangible and intangible benefits, where the revenue stream generated is far above the costs of account maintenance, and the degree of customer loyalty is such that the client routinely promotes the products offered by the company. As many businesses understand, maintaining customer profitability means possessing a strong customer service ethic that involves handling customer complaints quickly and effectively, as well as always listening to the voice of the customer, regardless of the nature of the query, comment, or concern. Failure to handle customer complaints or in any convey to the customer that he or she is not worth the effort opens the door for competitors to step in and win that client away, possibly never to return