Customer profitability

Question 1

Definition

Answer 1

CPA is a method of anaysing the profitabilty of each customer or customer segment by assigning costs and revenues to each customer and identyfying which customers are profitable or not

Question 2

Steps for cpa

Answer 2

1) Segment the market
2) Attribute revenue to each segment
3) Attribute costs to each segment= Marketing, development, customer retention, distributions ad other operational costs
4) Analyse the profitability of each segment= identofy how each segment contribbutes to overall profitabilty of the busienss, are the current strategies working?
5) Implement stratgies to maxiimise the profiutabilty.
=also asses the effectiveness of these straatgies= goals, define how to measure the success

Question 3

Challenges of cpa

Answer 3

-Are the figures to calculate costs and revenues relaible?
-How to recognise different cost and revenue drivers
-some companies have thousands of customers so its difficult
-Not suitable for customers who do not make repeated purchases
-too much focus on past customers, so might forget to market for new customers
-difficulty in incorprating multi -period horizon into the analysis
-difficult to identify future ownstream cost of customers