2. Are all customers profitable?
Sparrow Designs places a lot of rush orders
What’s the potential impact of these rush orders on Bradley’s operations?
Is there an extra cost to servicing these rush orders?
Is there a cost to the sales rep’s time?
By the way, Sparrow Designs orders $2 million a year

3. RESEARCH SAYS…
The top 20% of a company’s customers generate 120% of the company’s profits
The bottom 20% loses as much as 100% of the company’s profits.
So what would happen if the company dropped those bottom 20% customers?

4. What is customer profitability?
It is not just the gross profit generated by the customer
You need to consider all the costs of servicing the customer
This means all the selling and administrative costs must be included in the profit analysis
Think ABC

5. STEPS TO CALCULATING CUSTOMER PROFITABILITY
Identify all selling activities
Develop selling activity cost pools
Calculate selling activity cost pool rates
Allocate selling costs to customers
Calculate customer profit margin to include selling costs as well as cost of goods sold

6. MEASURES OF CUSTOMER PROFITABILITY
Customer revenues –
Cost of goods sold
Allocated selling expenses =
Customer net profit
customer net profit
customer revenues
Customer profit margin =

7. Morris & Morris

8. Sparrow Designs

9. What do you do with unprofitable customers?
Try to make them profitable
Move them to change use of activities to more toward profitability
Charge extra for the special services
As a last resort, drop the customer

10. LET’S PRACTICE
Exercise F5-5
© Carey Hope/iStockphoto

11. E F5-5 SOLUTION a. Total Cost (A) Total Activity (B) Activity Rate
(A) ÷ (B)
Online reservations
$240,000
40,000 online reservations
$6 per online reservation
Phone reservations
$980,000
98,000 phone reservations
$10 per phone reservation
Ticket mailings
$500,000
125,000 mailings
$4 per mailing
Courier deliveries
$160,000
10,000 deliveries
$16 per delivery

12. E F5-5 SOLUTION (cont.) b. Customer A: Ticket purchases $172,500
Ticket cost
(129,375)
Gross profit
43,125
Selling costs
Online reservations
500 reservations  $6
(3,000)
Phone reservations
0 reservations  $10
(0)
Ticket mailings
500 mailings  $4
(2,000)
Courier deliveries
0 deliveries  $16
Customer net profit
$38,125
Customer profit margin
22.10%
Customer B:
$180,000
(135,000)
45,000
0 reservations  $6
600 reservations  $10
(6,000)
120 mailings  $4
(480)
480 deliveries  $16
(7,680)
$30,840
17.1% b.