"Measuringand Managing Customer Profitability’by Cokins
The article evaluates the way in which a company can measure value ofthe customer. According to the article, there is an extensive gapbetween the sales and marketing role and the CFO’s function.Whereas the sales and marketing function can detect valuablecustomer, traditional accounting is concerned with evaluating thetotal revenue without evaluating profitability of maintaining eachcustomer. To enable the organization to measure the value of thecustomer, and be able to concentrate on profitable ones, the articleproposes the use of “profit margin management’ methods. Some ofthe profit margin management methods include understanding sources ofprofit and expenses and Activity Based Accounting (ABC) (Cokins23-24). After understanding its costs and revenue model, the companyhas to shed off the unprofitable customers (through such passive waysas gradual price increase) while striving to retain profitable onesthrough such methods as pricing incentives, streamlined deliveryprocess, and cost reduction.
The article suggest that ABC method is an invaluable tool, which willaccurately and economically trace the expense of an organization tothe products and customer groups, which place a different level ofworkload demand to the organization. In applying the ABC, theorganization uses various stages to segment and trace expenses andresources. According to the article, ABC accounting software enablesaccounting person trace cost of the product to the final object.Customers are usually the final object in the costing system becausethey produce a need for the organizational expenses (Cokins 25). Assuch the ABC costing software helps to isolate activities that do notcontribute directly to the customer’s value while at the same timegenerates regular reports that add to the satisfaction of thecustomer or value of any product.
On addition to using a valid cost model, the article proposes the useof customer life value (CLV) to project future profits, especiallyfor business-to-consumer companies. ABC helps the accounting managerto allocate costs in an optimal way to the valuable customers.Customers can be divided using a matrix, which is made up of valuableand less valuable customers. The management should focus on movingthe less valuable customers to be more valuable, while at the sametime ensuring that the valuable ones are retained at that status. Thearticle observes that CFO should expand their roles from justcarrying out financial reporting, accounting cost control andgovernance responsibilities. They can offer support to the marketingdepartment by assisting them to target relatively more appealingcustomers and to grow, retain, win back and acquire profitable ones.
I agree with the article that there is a wide gap between the aimsand objectives of the sales and marketing and those of the accountingdepartment. Each day, salespeople and marketers take risks that haveboth direct and indirect impact on financial performance of thecompany, yet the CFO does not have a full insight of what happens inthe generation of demand. ABC method is an important cost allocationmethod that can help the CFO to identify customers who are valuableto the company and who are not. When coming up with theorganizational strategy, it is paramount to know the value that thetarget customer will bring to the company. Knowing the value willhelp the organization to concentrate much on the customers with highmargin contribution, while reducing expenses on those with lowmargin. In brief, the article provides comprehensive analysis ofstatus of profitability of a customer and offers critical insightsthat can help a company to generate more value to its shareholders.
Cokins, Gary. "Measuring andmanaging customer profitability." StrategicFinance 96.8(2015): 23-30.