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Definition

Customer profit (CP) is the profit the firm makes from serving a customer or customer group over a specified period of time. Calculating customer profitability is an important first step in understanding which customer relationships are better than others. Often, the firm will find that some customer relationships are unprofitable. The firm may be better off (i.e., more profitable) without these customers. At the other end, the firm will identify its most profitable customers and be in a position to take steps to ensure the continuation of these most profitable relationships.[1]

Purpose

The purpose of the CP metric is to identify the profitability of individual customers, requiring that revenues and costs be assigned to customers individually. This allows the firm to identify which customers are profitable and which are not, and is a possible precursor to differential treatment designed to improve firm profitability. Rather than looking at customers in aggregate or averages, marketers can learn a lot by finding out what each customer contributes to the bottom line.

Construction

Customer profit is the difference between the revenues earned from and the costs associated with a specific customer relationship during a specified period.

References

  1. ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc. <http://www.amazon.com/Marketing-Metrics-Definitive-Measuring-Performance/dp/0137058292>


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