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•how to recognize different drivers of
customer costs. (Foster, Gupta and
Sjoblom 1996:10)
This requires a broader examination of
the costs associated with customer service.
For example, post-sale customer service
costs must be included in any analysis of
customer costs. Some customers require
substantially more post-sale service than
others. In addition, future environmental
liabilities related to the sales of current
products are additional downstream costs
that must be included. With management’s
increased focus on customers, this analysis
can provide forward-looking information
about individual customers and customer
segments and more broadly examine both
the revenues and costs related to customer
transactions. Revenues can vary among
customers due to variations in volume levels,
and differences in price structures, products
and services. Costs can also vary depend-
ing on how customers use the company’s
resources such as marketing, distribution,
and customer service. Unless a complete
analysis of the benefits and costs of cus-
tomer relationships is undertaken, compa-
nies will unknowingly continue to service
unprofitable customers. Only after a thor-
ough analysis of the costs and benefits can
a firm decide which customers to service
and strategically price its products and
There are many costs that are often hid-
den within the production, support, mar-
keting, and general administrative areas.
To better understand customer profitability
these costs should be examined and assigned
appropriately using ABC methods. These
currently hidden customer costs may
include items such as:
inventory carrying costs;
•stocking and handling costs;
quality control and inspection costs;
customer order processing;
•order picking and order fulfillment;
•billing, collection and payment process-
ing costs;
accounts receivable and carrying costs;
customer service costs;
wholesale service and quality assurance
costs; and
selling and marketing costs. (Weinberg
ABC was recently used by a telecommu-
nications company to improve customer
profitability. The company developed a
process for identifying the cost drivers of
training costs, which is an important com-
ponent of the company’s contract bids. The
company’s activities included the submis-
sion of bids to large organizations for the
installation of telecommunications systems.
The bids were reasonably accurate in esti-
mating the cost of the equipment hardware,
the installation cost of the new equipment,
and the programming costs. However, the
cost of training the customer’s employees
about the new equipment was more diffi-
cult to determine. Exhibit 8 represents an
outline of the customer profitability report-
ing system developed for one business unit
of this company (Ortman and Buehlmann
1998). This is an example of a detailed,
comprehensive, and somewhat costly
approach. As always there must be a bal-
ance between the benefits of collecting
additional data and the associated cost.
The availability and timeliness of data are
also significant issues in implementing
customer profitability systems based on
The major marketing activities were
identified and the resources that these
activities consumed were detailed. Employee
time was the major resource driver, and
was traced by an employee log to specific
activities. The company found that train-
ing costs were significant but difficult to
calculate. Customer service representatives,
who were at the front line in the training
function and formed a liaison between the
company, its customers and the engineers
who designed the systems, were interviewed.
The company was then able to identify
seven different training activities and
resource uses, along with potential cost
drivers. The estimation of customer service
training costs through the use of ABC
improved the company’s understanding of
the profitability of its different customers.
Whether customer-specific costs are
necessary and/or can be determined depends
on several factors, including the fragmen-
tation of the customer base, the cost struc-
ture of the company, and the existence of
the necessary information infrastructure.
Analysis can be crude and simple and even
incomplete, yet still effective at providing
valuable customer profitability information.
Some customer models have been devel-
oped to provide companies with a frame-
work to analyze the pricing of different
services for different types of customers.
An example of such a model can be seen
in Exhibit 9.
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