Intangibles in Customer Profitability

Updated: February 16, 2011

The uttermost disregard for intangibles in measurement of current customer profitability has led to wrong customer profiling and loss of key customers whose reactions burst forth in multiple streams of ripple effects, shrinking customer base and instilling measures of disillusionment in some loyal customers. This occurs against the backdrop of various customer intimacy philosophies asserting continuity of loyalty in infinitude. Customers are human beings and not exactly softwares. Customers respond to social stimulus: Change happens!

Unlike the current customer profitability, the conventional practice of estimating future customer profitability slot in components of customer intangibles as a means of discovering opportunities for upward movement in behaviour and exploration of greater depth of intimacy. The use of customer lifetime value models for programming the behaviour of customers has been greatly supported by extensive statistical models that enable forecast of future action based on extrapolation of the past. In industries where switching costs are either low or reasonably acceptable, customer lifetime value models would naturally elude feasibility, due to ease of relationship discontinuity. The impact of customer intangibles on final vista of future customer profitability is quite conceivable.

Computation of current customer profitability must integrate customer intangibles into its viewpoint in order to hoist engagement of accuracy. Therefore, the calculation of current customer profitability should be as follows:

Total CP = Financially Derived CP + CP Derived from Customer Intangibles

Whereas computation of Financially Derived Customer Profitability involves deducting cost of attracting, servicing, maintaining and ‘selling to' a customer from revenue generated as a reason of the customer's purchase transactions; in the case of Customer Profitability Derived from Customer Intangibles, the critical mass of assessment embodies a functional approach in keeping count of purchase transactions which occur owing to successful influence demonstrated or direct mandate issued by a customer, then calibrating a percentile score that must be identified as contribution and affixed as Customer Profitability Derived from Customer Intangibles. The percentile score can range from 1% to 100% and serves as a fraction of the triggered transaction deemed to be initiated by a particular customer. Occasionally, a purchase transaction could be triggered by the influence of more than one customer evangelist; and the percentile scoring would be effective in allocating contribution to each of them.

The implementation of customer intangibles computation requires effective tracking of referrals sources, extension of customer data focus, fitting positioning of right talents, and the use of BI tool for comprehensive evaluation.

Example

Table 1: Traditional Customer Profitability without Intangibles

Customer PurchaseTransaction Cost of Sales Total Customer Profitability

A 20,000 3,000 17,000

B 45,000 5,000 40,000

C 50,000 8,000 42,000

D 25,000 3,000 22,000



Table 2: Total Customer Profitability with Intangibles

Customer Purchase Trans Intangibles Cost of Sales Total Customer Profitability

A 20,000 200,000 3,000 217,000

B 45,000 10,000 5,000 50,000

C 50,000 ---- 8,000 42,000

D 25,000 40,000 3,000 62,000


In accordance with Table 1, if assessment of customer profitability considers only purchase transaction against cost of sales, then Customer C would be adjudged the most profitable. Table 2 shows that on account of intangibles, Customer A ranks highest in profitability, while Customer C plummets to the lowest position.

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