Profitability is the most significant measure to evaluate the success of any business. For a business to be profitable and successful in the long term, business owners need to identify the right strategic path. Understanding the profitability of significant customers or markets helps the business to evaluate the success of trading with those customers or in those markets.
What are the benefits OF OUR SERVICE?
- To identify the right strategic path for your business.
- To evaluate the success of trading with the right customers or in the most favourable markets, taking account of all business costs including overheads.
- Resources can be focussed on trading with profitable customers or in profitable markets with the business, therefore, maximising its performance and value.
The purpose of business, according to Peter Drucker, is “to Find, Keep and Grow the Right customer”, at Financial Strategic Insights we help you identify who is the Right customer and the profitable customer, in the Right market.”
What is the difference between customer and market profitability analysis?
- Customer profitability analysis measures the net profit earned by doing business with the customer.
- Market profitability analysis measures the net profit earned by undertaking business in a particular market. Trading in a market usually means trading with more than one customer. Wholesale and retail or public sector and private sector, are examples of different markets.
What is a profitable customer or market?
A profitable customer is a person, organisation, business or a company that over time yields revenue that exceeds, by an acceptable amount, the cost of attracting, selling and servicing that customer.
A profitable market is a market for the business that over time yields revenue that exceeds, by an acceptable amount, the cost of attracting, selling and servicing the group of customers with which they trade within that market.
Cost allocation
- Direct costs are those costs incurred to generate revenue, such as the purchase or production cost of units sold or services delivered
- Indirect costs or overheads are those costs that cannot be directly attributed to generating revenue, such as the cost of finance, marketing, communications and administration.
The challenge of any profitability analysis is to find a way of allocating the indirect costs to the significant customers or markets. To allocate indirect costs fairly, the key drivers for those costs need to be identified. Examples of drivers for indirect cost are:
- Revenue
- Labour cost or time
- Production cost or time
- The number of transactions, such as purchase orders or sales orders
- Time spent servicing the customers or markets
“We help small businesses understand the profitability of trading with key customers or markets. This enables business owners to develop strategies to improve profitability, focusing resources on profitable customers and markets.” Peter Foster
If you want to discuss how you can utilise Peter to perform a Customer and Market Profitability Analysis, please get in touch with him and learn how we can help your business.
