Customer profitability is defined as the profit earned by the organization by serving the customers of the organization over a specified period of time. It is also defined as the difference between the revenues earned and cost associated. Calculating customer profitability is important component for the organization to understand what customer relationships are better for the organization and what should be done to further this relationship.
It will also help the company to know the unprofitable relationships and how to turn them profitable or abandon them. It is basically applying the profits of an organization to customer relationships and measuring customer profitability provides valuable business insights to the company. From this we get to know that a small percentage of firm’s customers form a major portion of the profit.
On the other hand, it provides the information about the worst customers and and how much does it cost to company to serve them. Sometimes, it costs more to company to actually serve these customers which shrink the profits.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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