Customer Profitability Score

Description:

Customers contribute varying amounts (and value) to a company over the purchasing cycle. It is important to understand which customers contribute positively to the organisation’s profit and identify which customers will not generate appropriate revenue to cover transaction costs. This measure is intended as a tool to inform/prioritise resources to focus effort on the retention of the “right” customers rather than striving to satisfy all customers regardless of their value to the organisation. It is important to schedule analysis over the purchasing cycle in order to consider the customers’ historic value, current value, present value and lifetime values at appropriate times.

Calculation:

Customer Profitability Score = revenues earned from a customer in a given period minus the cost of supporting the customer in the same period.

Example:

E.g. If the average annual cost per customer is £195:  Customer A generates £365 profit, CPS = 365-195 = £170.  Customer B generates £1425 profit, CPS = 1425-195 = £1230.  Therefore customer B is more valuable than customer A.