42. Evaluating Product & Customer Profitability

Question 1

What does the whale curve chart demonstrate and how can organizations use this chart?

Answer 1

• The whale curve chart demonstrates an analysis of customer profitability by organizing customers from most profitable to least profitable and comparing that relationship to total profits in the organization. If organizations can track all the costs related to each customer, they can identify the profitability of each customer.
• The top of the whale curve demonstrates a crossover point for individual customer profitability. The customers to the right of the curve are unprofitable and reduce profitability.

Question 2

What does the Customer Profit Migration Chart represent?

Answer 2

• It represents the twofold relationship between the total margin on purchased goods and services that a customer generates and the total costs to serve that customer’s relationship with the SBU.
• The same crossover point in the whale curve is demonstrated in the migration chart with the customers whose margin on purchases and offsetting use of support processes results in either a small profit or a small loss.

Question 3

What are the characteristics of the most profitable and most unprofitable customers in an SBU’s portfolio?

Answer 3

• The customers who purchase a high volume of product or services or who select high-margin products and engage in customer support processes efficiently are the most profitable customers for the SBU.
• Customers who demand a lot of special support activities in the CRM process and yet don’t produce much profit margin on product sales are the most unprofitable customers in the portfolio.

Question 4

Briefly describe what measurement surrogation means

Answer 4

• Measures function as imperfect surrogates for (or representations of) the actual strategic objective in the organization.
• If managers focus too much on a specific measure, they start making decisions strictly to increase that measure, regardless of the possible negative effects on the long-term profitability of the organization.
• For example, too much focus on reducing reported costs and increasing reported revenues can lead to a loss of focus on sustainable cost drivers and quality revenue drivers.