Profitability Analysis
What brings in the most profit? Finding out is the job of profitability analysis.
Yet profitability analysis by product or service is more often done than profitability analysis by customers.
And that can be misleading, since it's the customer that generates the revenue.
Companies that have done customer profitability analyses have some startling results. It's often said 20 per cent of the customers produce 80 per cent of the revenue. But there are cases where that 20 per cent may generate 80 per cent of the profit. And other cases where some customers generate profit in the short term but not the long, while others generate profit over the long term but not the short.
All customers matter. But some customers are clearly critical to business success, while others may be taking up more attention and shareholder value than they should.
Which are which? And how can a company best spot them, study them, provide maximum value to them and extract maximum value from them.
Helping you answer those questions is what market segmentation is all about.
Are your largest customers and markets really generating the largest profits? Or could they also be generating the greatest costs, and therefore really be the cause of significant losses.
Are apparently lackluster segments of the market in fact generating solid steady income with little service costs? Are strong niche markets beginning to outperform major traditional ones?
Profitability analysis can show you, once good market segmentation research gives it the information it needs.
