Using the Five-Step Decision-Making Process to Manage Customer Profitability

In this section, we apply the five-step decision-making process (introduced in Chapter 1) to help understand how managers use customer analyses to allocate resources across customers.

  1. IDENTIFY THE PROBLEM AND UNCERTAINTIES. The problem is how to manage and allocate resources across customers. Managers are uncertain how their actions will affect future customer profitability.
  2. OBTAIN INFORMATION. Managers identify past revenues generated by each customer and customer-level costs incurred in the past to support each customer.
  3. MAKE PREDICTIONS ABOUT THE FUTURE. Managers estimate the revenues they expect from each customer and the customer-level costs they will incur in the future. In making these predictions, managers consider the effects that future price discounts will have on revenues, the effect that pricing for different services (such as rush deliveries) will have on customer demand for these services, and ways to reduce the cost of providing services. For example, Deluxe Corporation, a leading check printer, reduced the cost to serve customers by opening an electronic channel to shift customers from paper to automated ordering.
  4. MAKE DECISIONS BY CHOOSING AMONG ALTERNATIVES. Managers use customer-profitability profiles to identify the small set of customers who deserve the highest service and priority and also to find ways to make less-profitable customers (such as Astel’s Customer G) more profitable. Banks, for example, impose minimum balance requirements on customers. Distribution firms require minimum order quantities or levy a surcharge for smaller or customized orders. In making resource-allocation decisions, managers also consider long-term effects, such as the potential for future sales growth and the opportunity to leverage a particular customer account to make sales to other customers.
  5. IMPLEMENT THE DECISION, EVALUATE PERFORMANCE, AND LEARN. After the decision is implemented, managers compare actual results to predicted outcomes to evaluate the decision they made, its implementation, and ways to improve profitability.