Customer profitability (CP) is the profit the firm makes from serving a customer or customer

group over a specified period of time, specifically the difference between the revenues earned
from and the costs associated with the customer relationship in a specified period. According to
Philip Kotler,"a profitable customer is a person, household or a company that overtime, yields a
revenue stream that exceeds by an acceptable amount the company's cost stream of attracting,
selling and servicing the customer."
Calculating customer profit is an important 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 (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. However, abandoning customers is a
sensitive practice, and a business should always consider the public relations consequences of
such actions.[1]

Contents
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 1Purpose
 2Construction
 3Cautions
 4See also
 5References
 6Other sources
 7External links

Purpose[edit]
Although CP is nothing more than the result of applying the business concept of profit to a
customer relationship, measuring the profitability of a firm’s customers or customer groups can
often deliver useful business insights.
The purpose of the “customer profit” metric is to identify the profitability of individual customers.
Companies commonly look at their performance in aggregate. A common phrase within a
company is something like: “We had a good year, and the business units delivered $400,000 in
profits.” When customers are considered, it is often using an average such as “We made a profit
of $2.50 a customer.” Although these can be useful metrics, they sometimes disguise an
important fact that not all customers are equal and, worse yet, some are unprofitable. Simply put,
rather than measuring the “average customer,” we can learn a lot by finding out what each
customer contributes to our bottom line.[1][2]
Quite often a very small percentage of the firm’s best customers will account for a large portion of
firm profit. Although this is a natural consequence of variability in profitability across customers,
firms benefit from knowing exactly who the best customers are and how much they contribute to
firm profit.
At the other end of the distribution, firms sometimes find that their worst customers actually cost
more to serve than the revenue they deliver. These unprofitable customers actually detract from
overall firm profitability. The firm would be better off if they had never acquired these customers
in the first place.

Construction[edit]
Customer profitability is the difference between the revenues earned from and the costs
associated with the customer relationship during a specified period. In theory, this is a trouble-
free calculation. Find out the cost to serve each customer and the revenues associated with each
customer for a given period.[1]
The biggest challenge in measuring customer profitability is the assignment of costs to
customers. While it is usually clear what revenue each customer generated, it is often not clear at
all what costs the firm incurred serving each customer. Activity Based Costing can sometimes be
used to help determine the costs associated with each customer or customer group. For
components of cost not directly related to serving customers, the calculation of customer profit
must use some method to fully allocate these costs to customers if the total of customer profit is
to match the operating profit of the firm. If the firm decides not to allocate these non-customer
costs to customers, then the sum of customer profit will be greater than the operating profit of the
firm.