Business Process Optimisation: Improving Efficiency & Growth

In the increasingly data-driven world, the ways in which business can strategise to continually increase profit are numerous. While many organisations focus on acquiring new customers, this is inevitably costly, and not all customers contribute equally to profitability. In fact, some customers generate significant revenue with minimal costs, while others consume excessive resources without delivering a strong return.

This is where Customer Profitability Analysis (CPA) comes in. Evaluating the financial contribution of each customer allows businesses to make informed decisions about pricing, service levels, marketing efforts, and resource allocation. The result? Increased revenue, improved efficiency, and a stronger competitive position.

What is customer profitability analysis?

Customer Profitability Analysis (CPA) is a method used by businesses to measure the profitability of individual customers or customer segments, rather than purely focusing on product line profitability.

Unlike general revenue analysis, CPA takes into account both revenue and costs incurred in servicing a particular customer/cohort, ensuring businesses understand the true value of each customer.

Customer profitability vs. customer lifetime value (CLV)

While similar, CPA and CLV serve different purposes:

Customer Profitability Analysis focuses on current profit contributions of individual customers, helping businesses optimise short-term financial performance
Customer Lifetime Value (CLV) estimates the total future revenue a customer is expected to generate, providing a long-term perspective

Integrating both metrics means that you can develop a comprehensive view of customer value and tailor your strategies accordingly.

Benefits of customer profitability analysis

1. Increased revenue & profitability

Not all high-revenue customers are profitable. CPA helps businesses identify which customers generate the highest net profit by factoring in the costs associated with servicing them.

For example, a subscription-based software company might find that enterprise clients, while paying higher fees, require extensive support and customisation, making them less profitable than mid-sized businesses with minimal service needs.

2. Cost optimisation & efficiency

CPA reveals which customers consume excessive resources without generating proportional revenue. With this information at hand, businesses can then explore ways to reduce servicing costs, such as automating processes or offering self-service options, to improve efficiency without compromising customer experience.

A telecom provider may discover that a certain customer segment frequently contacts customer support, driving up service costs. They could introduce an AI-powered chatbot to handle routine enquiries and lower support expenses.

3. Data-driven decision making

CPA eliminates guesswork, providing a clear financial picture of each customer’s contribution. This enables you to:

Refine pricing strategies
Adjust marketing investments
Identify upsell and cross-sell opportunities

How to conduct customer profitability analysis

Step 1: Collect relevant data

The first step is to gather comprehensive data on both revenue and costs associated with each customer. Without accurate and detailed data, you run the risk of making decisions based on incomplete insights.

Start by collecting revenue data, which includes sales transactions, recurring revenue, and purchase frequency. This helps establish how much each customer contributes to the company's top line.

This process will involve classifying expenses into two main categories:

Direct costs are expenses that can be specifically attributed to an individual customer. These may include the cost of manufacturing a product, providing a service, or handling customer support enquiries. Since these costs vary from customer to customer, accurately tracking them is essential for understanding true profitability.
Indirect costs, on the other hand, are expenses that are shared across multiple customers. These can include marketing campaigns, administrative expenses, and operational overhead. While these costs are not tied to any single customer, they still play a role in overall profitability and must be allocated accordingly.

This allows you to move beyond simple revenue tracking and gain a clearer picture of customer profitability.

Step 2: Allocate costs per customer

Once revenue and cost data have been collected, the next step is to determine how much it costs to serve each customer.

For example, consider an insurance company where two customers pay the same premium. One customer rarely interacts with support, while the other frequently calls for assistance, increasing service costs. Although both generate the same revenue, the second customer is less profitable due to the additional resources required to serve them.

Step 3: Segment customers by profitability

After assigning costs to each customer, the next step is to categorise them based on profitability levels. Segmenting customers into high, medium, and low profitability groups, gives you a more holistic view, from which you can make more informed decisions about resource allocation, marketing efforts, and service strategies.

High-profit customers are those who generate significant revenue while incurring relatively low costs. These loyal, high-value customers are worth investing in, as they contribute the most to the company’s bottom line.
Medium-profit customers may require some cost reduction strategies to enhance their profitability. These customers contribute revenue, but might also generate moderate servicing costs.
Low-profit or unprofitable customers often require more resources than they generate in revenue. In some cases, it may not be financially viable to retain them.

Step 4: Analyse trends and identify areas for improvement

Once customers have been segmented by profitability, the next step is to analyse trends and uncover opportunities for improvement. By identifying common patterns among the most and least profitable customers, you have the ability to refine your strategies to enhance revenue and reduce costs.

Start by examining which channels attract the most profitable customers
Next, assess whether certain customer types require more costly services
Finally, consider whether pricing or operational adjustments could enhance profitability

Step 5: Take action and optimise strategy

With a clear understanding of customer profitability trends, the final step is to take proactive measures to optimise your strategy. The insights gathered from the analysis phase should now guide data-driven decisions aimed at maximising profitability while maintaining strong customer relationships. Combining this with Customer Lifetime Value insights will enable businesses to treat each segment as required:

For high-value customers, consider offering premium services or exclusive benefits to reinforce loyalty and encourage long-term engagement. This could include priority support, personalised account management, or enhanced product offerings, ensuring these profitable customers receive the attention they deserve.
Meanwhile, for low-profit segments, businesses should focus on reducing operational inefficiencies. This might involve automating routine tasks, streamlining customer service processes, or encouraging self-service options to lower servicing costs without sacrificing customer satisfaction.

Better data, higher profit

Customer Profitability Analysis is a powerful tool that helps businesses make smarter decisions, optimise resources, and drive sustainable growth. By implementing CPA and combining it with Customer Lifetime Value, your business can ensure that the focus is on the right customers, at the right time, with the right strategies.

We specialise in transforming complex data into actionable insights. Our Customer Lifetime Value platform enables you to take your customer profitability analysis to the next level, get in touch with our experts to find out more.