Customer profitability analysis
Customer profitability analysis applies activity-based costing logic to individual customers or segments, tracing revenues and all service costs to reveal which customer relationships generate profit and which destroy value.
FrameworkActivity-based costing
See it move
Customer profitability analysis plots customers by revenue against cost to serve. Low-cost, high-revenue customers are star customers generating most of the profit. High-revenue but high-cost customers are expensive to maintain. Low-revenue, low-cost customers stay lean but small, while low-revenue, high-cost customers actively destroy value once activities like order processing and delivery are traced to them.
Check yourself
A distributor applies activity-based costing to its customer base. Customer P places 90 small orders per year, each requiring a separate delivery. Customer Q places 5 bulk orders per year under standard delivery terms. Both customers generate identical annual revenue and identical product gross margin. What does customer profitability analysis most likely reveal?