“The value of an idea lies in the using of it.”
Thomas A. Edison

I love this quote.  Ideas abound, especially in this day and age with the speed of technology change, new communication mechanisms, etc.  But there is one idea that warrants more consideration in the CRM (customer relationship management) strategy world – Activity Based Costing (the “ABC”).

Ideas about how to analyze your customer base are everywhere – where is the upside in selling more to existing customers, where are the new segments, etc.?  All great questions that I wholeheartedly support. (In fact, if you are not doing this you are behind the curve.) But let’s talk about something that can put you ahead of the curve.

In the mid 2000’s, Robert Kaplan, the father of the Balanced Scorecard, issued a report stating the following customer profitability[1].

% A Company’s Total Customers % of a Total Profits Derived from These Customers
20% 110%
40% 125%
90% 125%
100% 100%

Kaplan cites a myriad of things that can drive this profitability curve.  One where 40% of your customers drive maximum profitability, the next 50% you just break even on, and 10% where you lose big.

“The list is wide-ranging: product or service customization; small order quantities; special packaging; expedited and just-in-time delivery; substantial pre-sales support from marketing, technical, and sales resources; extra post-sales support for installation, training, warranty, and field service; and liberal payment terms. While all of these services create value and loyalty among customers, none of them come for free.”

Most companies have focused the profitability measurements on the thing they can measure – product profits.  With the right customer relationship management and business intelligence infrastructure, leading companies are now able to assign costs driven by the non-product related items that Kaplan mentions.  Specifically those around “substantial pre-sales support from marketing, technical, and sales resources; extra post-sales support for installation, training, warranty, and field service”.

The exercise is actually a pretty simple one.  With the right CRM application in place, you can track activities (the “A” in ABC), all that drive costs, to a specific customer and/or product.  Sales calls, service calls, etc. can be allocated a value and applied to the customer profitability equation.  While these costs may not materially affect the profitability of your top 20%, they will move some of that middle 50% to the negative column.  I guarantee it.  With this knowledge in hand, management is in a better position to manage by reallocating sales and service coverage, charging customers for certain activities that were not charged in the past, and “firing” the least profitable customers.

So ask yourself, where are my most and least profitable customers?  Which ones are profitable based only on the products they purchase and which ones are profitable when all costs are fully allocated?  If you do not have that information at your fingertips (It took Kaplan a long time to derive the research, but with the right tools, you should have it at your fingertips), you are not alone.  What are the ideas for doing something about it?  What are you going to do to use those ideas?  Executing through your CRM system should be part of that plan.

This is just a sample of the kinds of insight a properly implemented and executed CRM and Business Intelligence strategy can deliver. To learn more about how to best utilize Activity Based Costing in your CRM strategy, visit Madrona Solutions Group at www.madronasg.com or click here to contact us directly with your questions and comments.

By Madrona Solutions Group, Dynamics CRM and Business Intelligence Consulting, Seattle, WA

[1] http://hbswk.hbs.edu/item/4938.html

The ABCs of CRM: What You Should Know About Activity Based Costing is a post from: CRM Software Blog