customer profitability analysis analysis that assigns revenues and costs to major customers or groups of customers rather than

to organizational units, products, or other objects.

The results may direct organizational resources toward more profitable uses. It is an application of segmented reporting in which a customer group is treated as a segment.

It is especially helpful when combined with an activity-based costing approach that determines which activities are performed for each group and assigns costs based on appropriate drivers. For example, activities, their drivers, and their costs may be classified as order level, customer level, channel level, market level, or enterprise level.

Meaning: customer profitability is the difference between the revenues earned from and the costs associated with the customer relationship in a specified period.

Definition(CAP): A profitable customer is a person, house hold or a company that overtimes yields a revenue stream that exceeds by an acceptable amount the company cost stream of attracting selling and servicing the customers.

CPA is an important management accounting tool based on the recognition that each customer is different: 1.CPA can be used to help company to understand . 2. How dependent they are on the most profitable customer. 3. What proportion of resources are used for different customers.

4.The full cost of servicing a customer including advertising , service and return.

5.And in which customers are targeted by Competitors.

The general approach to CPA is based on segmenting the customers based to determine the revenue and cost attributable to each segment:
1. 2. 3.

Customer segmentation.
Revenue attributable to each segment.

ABC to determine the cost attributable to each segment.

4.Analyse the profitable versus the less profitable or unprofitable customer segment. 5.Develop strategies to maximize profits from profitable customer and reduce or eliminate less profitable. 6.Review the impact of the new strategies on the performance of the customer segments.

Focus on Retaining Your Existing Customers. Customer Lifetime Value (Next 5 Years Value) Determine a Customers Life stage and Needs Measure Customer Profitability

Companies may not have the data capture systems to produce an accurate estimation of customer segmental revenues and costs. There may be practical difficulties in calculating costs attributable to each segment.

CPA may overlook the combination of products or services purchased by customer. CPA depends on mix of products or services bought