"The value of an idea lies in the using of it."
Thomas A. Edison
I love this quote. Ideas abound, especially in this day and age with the speed of technology change, new communication mechanisms, etc. But there is one idea that warrants more consideration in the CRM (customer relationship management) strategy world – Activity Based Costing (the “ABC”).
Ideas about how to analyze your customer base are everywhere – where is the upside in selling more to existing customers, where are the new segments, etc.? All great questions that I wholeheartedly support. (In fact, if you are not doing this you are behind the curve.) But let’s talk about something that can put you ahead of the curve.
In the mid 2000’s, Robert Kaplan, the father of the Balanced Scorecard, issued a report stating the following customer profitability[1].
| % A Company’s Total Customers | % of a Total Profits Derived from These Customers |
| 20% | 110% |
| 40% | 125% |
| 90% | 125% |
| 100% | 100% |
Kaplan cites a myriad of things that can drive this profitability curve. One where 40% of your customers drive maximum profitability, the next 50% you just break even on, and 10% where you lose big.
“The list is wide-ranging: product or service customization; small order quantities; special packaging; expedited and just-in-time delivery; substantial pre-sales support from marketing, technical, and sales resources; extra post-sales support for installation, training, warranty, and field service; and liberal payment terms. While all of these services create value and loyalty among customers, none of them come for free.”
Most companies have focused the profitability measurements on the thing they can measure - product profits. With the right customer relationship management and business intelligence infrastructure, leading companies are now able to assign costs driven by the non-product related items that Kaplan mentions. Specifically those around “substantial pre-sales support from marketing, technical, and sales resources; extra post-sales support for installation, training, warranty, and field service”.
The exercise is actually a pretty simple one. With the right CRM application in place, you can track activities (the "A" in ABC), all that drive costs, to a specific customer and/or product. Sales calls, service calls, etc. can be allocated a value and applied to the customer profitability equation. While these costs may not materially affect the profitability of your top 20%, they will move some of that middle 50% to the negative column. I guarantee it. With this knowledge in hand, management is in a better position to manage by reallocating sales and service coverage, charging customers for certain activities that were not charged in the past, and “firing” the least profitable customers.
So ask yourself, where are my most and least profitable customers? Which ones are profitable based only on the products they purchase and which ones are profitable when all costs are fully allocated? If you do not have that information at your fingertips (It took Kaplan a long time to derive the research, but with the right tools, you should have it at your fingertips), you are not alone. What are the ideas for doing something about it? What are you going to do to use those ideas? Executing through your CRM system should be part of that plan.
This is just a sample of the kinds of insight a properly implemented and executed CRM and Business Intelligence strategy can deliver. To learn more about how to best utilize Activity Based Costing in your CRM strategy, visit Madrona Solutions Group at or click here to directly with your questions and comments.
By Madrona Solutions Group, Dynamics CRM and Business Intelligence Consulting, Seattle, WA
[1] http://hbswk.hbs.edu/item/4938.html
Yes, I wholeheartedly agree! ABC can be a powerful and business-changing tool when implemented in a thoughtful manner and supported by the right management environment. As you noted, ABC uncovers REAL customer profitability; it helps make strategic market decisions regarding pricing structures, product mix, services rendered (and billed for!), customer “firings,” etc. ABC offers any business model a unique vision of how its costs and profits are driven by the activities it performs. It can answer: where profit “pressure points” exist or where that pressure might be relieved; which clients drive or reduce overall revenues; how product offerings/mix or pricing structures drive improved profitability; what is the correct price for a product or service offering; and many other questions. Its power and use may, in fact, be limitless – I’ll admit that I’m biased.
Still, integrating ABC and its decision-making power into any strategic vision or day-to-day operation can often be a “tricky” proposition. Look at the number of failed implementations across any industry. If ABC were a universally-recognized accounting tool, we’d see it mandated and employed in a manner much like the financial reporting standards that exist today. And even when it’s prescribed, ABC is often ignored. In the federal government alone, there are no less than seven mandates requiring ABC:
• The President’s Management Agenda,
• Managerial Cost Accounting Concepts and Standards for the Federal Government (FFAS No. 4),
• Government Performance and Results Act (GPRA),
• The Accountable Government Initiative,
• OMB Budgeting Directives,
• GPRA Modernization Act of 2010, and
• The Open Government Directive.
And still, ABC is “alive and well” in less than 10% of our US agencies. Without revenue and/or product profitability as a burning issue, ABC attempts appear “cursed” from the start, predestined for failure.
As a practitioner myself, with over twenty years experience implementing ABC solutions, I have known my share of failures and false starts. You are right to suggest that any consultant start with the end in mind. – a corporation’s strategic and/or tactical goals. What is your organization trying to achieve and how does it hope to get there (profitably!)? Are you looking to outsource an activity and want to know the all-in cost to better compare external and internal offerings? How should you prioritize your products to better maximize profits? Are you looking to set product price and need to re-capture all the costs, including overhead, of production? What is the nature of your business; are you a limited product manufacturing firm or a multi-faceted entity with many products? Would you like to know which customers are profitable and how you might re-price for those who aren’t? All these questions should be a starting point when considering an ABC costing methodology. For some of these answers, ABC works and works perfectly well. For others, it shouldn’t even be considered nor discussed.
In many ways, ABC walks a figurative tightrope. It must adjust its stance and move the bar as political winds shift and/or operational conditions dictate. To reach a successful end, there are many issues it must traverse; and when it crosses to the other side, most will stand in awe. A good consultant successfully walks that rope.