Customer profitability

Customer profitability is a form of analysis that assigns revenues and expenses to customers, rather than to products or processes. This analysis can be made more accurate by using activity-based costing to assign ordering, customer service, and distribution costs to individual customers. By doing so, a business can differentiate between its high-profit and low-profit customers. With this information, a firm can enhance its profitability by dropping unprofitable customers and concentrating its sales efforts on its most profitable customers. Customer profitability analysis is especially useful when a company has no excess capacity with which to service its customers, and so can increase its available capacity by dropping its least valuable customers.