Strategic benefits of CPA
1. Cost and revenue management
Without the allocation of marketing, sales, and service costs to individual customers, there is no way of knowing whether the investments made in business development are justified. CPA enables account managers to bring marketing expenditures per customer in line with current revenues per customer and with future revenue potential.
Revenues are managed through pricing. There are three important issues related to pricing: discounts, the pricing of value-added services, and discriminatory pricing. Discounts are based on sales volume now in the absence of CPA. This can result in large customers with particularly high service demands receiving discounts that are larger than their customer …show more content…
Using CPA, Kanthal found that some of the customers with the most sales were the most unprofitable, with two very unprofitable customers in the top three in terms of sales volume. The company also discovered that the most profitable 5% of the customers generated 150% of the profits. Traditional cost accounting often supports a 20-80 rule that 20% of the largest customers, who purchase the most products, contribute 80% of the profits; and this is our current assumption for our company too. Using CPA, their analysts have often found that 20% of the customers generate 300% of the profits. The remaining 80% of the customers are actually unprofitable and can result in a loss of 200% of the profits. They were able to then formulate strategies specifically to turn the unprofitable customers into profitable ones. If our CPA returns such results, it could give us key information as to which customers were the culprits of our recent unsatisfactory …show more content…
This approach has the advantage that the profitability of different manufacturing units could be compared with each other. Weaker units could be benchmarked against stronger units and; in this way, corporate performance could be improved. With the market matures and growth slow down, however, customer acquisition opportunities has become scarce and a loss of customers is more serious. Therefore, we have been adding considerable service elements alongside our products. Thus, costs to serve customers are increasing far faster than the actual cost of making goods and constitute a larger proportion of company budgets. In light of this, it is now more appropriate than ever to switch to a customer profit approach with an activity-based costing
1. Cost and revenue management
Without the allocation of marketing, sales, and service costs to individual customers, there is no way of knowing whether the investments made in business development are justified. CPA enables account managers to bring marketing expenditures per customer in line with current revenues per customer and with future revenue potential.
Revenues are managed through pricing. There are three important issues related to pricing: discounts, the pricing of value-added services, and discriminatory pricing. Discounts are based on sales volume now in the absence of CPA. This can result in large customers with particularly high service demands receiving discounts that are larger than their customer …show more content…
Using CPA, Kanthal found that some of the customers with the most sales were the most unprofitable, with two very unprofitable customers in the top three in terms of sales volume. The company also discovered that the most profitable 5% of the customers generated 150% of the profits. Traditional cost accounting often supports a 20-80 rule that 20% of the largest customers, who purchase the most products, contribute 80% of the profits; and this is our current assumption for our company too. Using CPA, their analysts have often found that 20% of the customers generate 300% of the profits. The remaining 80% of the customers are actually unprofitable and can result in a loss of 200% of the profits. They were able to then formulate strategies specifically to turn the unprofitable customers into profitable ones. If our CPA returns such results, it could give us key information as to which customers were the culprits of our recent unsatisfactory …show more content…
This approach has the advantage that the profitability of different manufacturing units could be compared with each other. Weaker units could be benchmarked against stronger units and; in this way, corporate performance could be improved. With the market matures and growth slow down, however, customer acquisition opportunities has become scarce and a loss of customers is more serious. Therefore, we have been adding considerable service elements alongside our products. Thus, costs to serve customers are increasing far faster than the actual cost of making goods and constitute a larger proportion of company budgets. In light of this, it is now more appropriate than ever to switch to a customer profit approach with an activity-based costing