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In general it is fairly easy to calculate the revenue per product and service, and also revenue per customer. However, the profitability equation for costs is harder to pinpoint.

Indeed, many organizations do not know the true cost of their customers / products / services. While some organizations calculate these costs, their managers may question the results. Since they do not fully grasp cost behaviour and the impact that has on profitability per customer, product and service, their decisions may not be fully informed. In fact, it is not easy to make decisions about improving company profitability without fully knowing what areas need to be improved.

Once they have identified the business practices that require changing, organizations can quickly move to increase their profitability.

an organization has the potential to make $8.1 M in profits but sees its profit reduced to $6 M by selling unprofitable products, or by selling profitable products to clients who, although initially profitable, are no longer so due to distribution costs, after-sales service, etc.

Costing

When managers have a better understanding of their cost behaviour, they can identify their unprofitable products, customers and distribution channels.  This enables them to formulate the appropriate strategies; for example, they could implement one of the margin management techniques to make those clients profitable:

  • Impose a surcharge or adjust the price in light of the additional expenses required to serve that client
  • Propose various service level options to the client that are still profitable for you
  • Adjust that client’s product/margin mix by, for instance, grouping products or services
  • Negotiate different terms that would positively impact your cost structure, such as producing a bi-monthly rather than a weekly report, for example
  • Cut back on services and/or raise prices
  • Improve processes
  • Abandon unprofitable customers, products or services

With the Decimal Suite, users can model cost behaviour based on cause-effect relationships. Results can be analyzed from various angles, enabling managers to better understand the results and improve the organization’s performance.

Download the profitability optimization brochure