Developing an Effective Measure of Customer Profitability

Abstract

Profitability is widely recognized as the primary measure of performance for marketing activities. Unfortunately, the difficulty of identifying and capturing relevant cost and revenue data have combined to make sales revenue or market share the dominant operational measures of performance. As a result, profit is reduced to an aggregate performance measure, frequently viewed through the lens of financial reporting systems. Interest in evaluating individual customer profitability as a performance measure is, however, growing given recent advances in micro-marketing technology and supporting activity based accounting systems. To this end, three alternative methods for improving a firm’s ability to measure customer profitability are discussed in this paper.