MKT6210 Leadership in Marketing Management Final Exam

MKT6210 Leadership in Marketing Management Final Exam

Q1. Describe Customer Profitability Analysis and how this is used in organizations to increase profit, then, discuss the relationship between customer profitability analysis and customer lifetime value.Customer Profitability Analysis

A Customer Profitability Analysis (CPA) is an evaluation process that centers on subscribing costs of revenues of a product to its consumer base, rather than attributing it to the sales of that product. This analysis provides a unique approach to the profitability notion of an organization, which greatly affects how the manufacturing, designing and selling of a good influences the cost and revenue levels of that product, to the company.

Many business organizations employ CPA as a means of reforming their process of selling and manufacturing so that a maximum return can be accomplished through lowest possible costs. In addition, CPA helps to determine the levels of profit that a customer generates for the business.

The key importance for measuring any firm's customer profitability is due to the main reason that it has been observed that about twenty percent of the customers tend to contribute to the eighty percent of revenues through sales to the company. Thus, this correlates with the 20/80 model. Unilever is an ideal example of a business organization that utilizes customer profitability analysis.

Benefits

CPA possesses many benefits for an organization, these include in helping the business to review each aspect of its operations critically, so to allow proper functioning in a way that allows for the generation of maximum profits. Along with, this analysis further helps the business to identify factor that could negatively influence the future of the company, through its function of reflecting percentages for each of the segments of the company's customer base related to the percentage of profit that they contribute to the company.

This helps a business to analyze and take measures for diversifying and expanding its customer base, especially if a small segment of its customer base is contributing to the maximum revenue generation of the company. Through, diversifying and expanding its customer base, the business organization is ensuring and safeguarding its own future profit generation as it is reducing the risk of relying on such a small segment of its customer base that generates large revenues, in the event that this customer base is reduced or gets withdrawn due to any reason.

To highlight further benefits of CPA, it is vital to mention that it reviews and follows the entire value chain of an organization. It provides great emphasis on the multiple transactions of a customer as well as determines the trends in their purchases. As well as, it can help determine the separate costs that are customer specific according to the desire of the management.

Relationship between CPA and Customer Lifetime Value (CLV)

There is a closely interlinked relationship between both CPA and CLV aspects of a business, where the business can focus exclusively upon those customers that play key role in its revenue generation. In addition, the business can too analyze the additional ...