Lesson 7

Question 1

3. explain the hierarchy of customer-related costs

Answer 1

Cost-hierarchy concept in which costs are categorized into different cost pools on the basis of different types of cost drivers

Customer output-level costs - cost of activities to sell each unit - product handling costs of each unit sold

Customer batch level costs - costs of activities related to a group of units sold to a client - costs incurred to process orders or make deliveries

Customer sustaining costs - costs of activities to support individual clients regardless of qty sold - costs of visits to clients or costs of client displays

Distribution channel costs - costs of activities related to a particular distribution channel rather than to each unit of product - mgr salary for retail distribution channel

Corporate sustaining costs - cost of activities that cannot be traced to ind clients or distribution channels - top mgmt. or gen admin costs

Question 2

4. outline the goals of customer profitability analysis.

Answer 2

Passive Customers

• product/service is crucial
• good trading partners

Savvy Customers
 pay top-shelf price
 costly to serve

Cheap Customers
 price sensitive
 low service and quality requirements

Aggressive Customers
 leverage their buying power
 buy low margin

Passive customers are highly profitable; aggressive customers are very unprofitable. The
middle ground belongs to two groups—cheap customers (who are only nominally
demanding, but are also price sensitive) and savvy customers who, while willing to pay top
prices, are also costly to serve. Customers with high sales volume are not necessarily highly
profitable. The level of a customer’s profitability depends on whether the net revenues
recover customer-specific costs to serve.

Question 3

15. outline the key barriers to customer profitability analysis.

Answer 3

• convincing mgmt. potential org improvements justify resource allocation
• obtaining significant required resources including IT, equipment, and staff for analysis and prep
• changing sales incentive system to reward cus profitability vs sales volume
• get buy in from ees who are reluctant to change
• training ees in the use of customer profitability analysis and its measurements and rewards