BDC outlines 5-step customer profitability analysis

The Business Development Bank of Canada (BDC) has introduced a framework designed to help businesses assess the true profitability of their customer base. The five-step analysis is intended to pinpoint clients that consume more resources than they generate in revenue and provide strategies to rectify such situations.

According to BDC, many businesses, particularly in the B2B sector, dedicate significant time and financial resources to clients with low purchase volumes. Ajay Sirsi, Director of the Centre for Customer Centricity at York University's Schulich School of Business, notes that this can erode company profits unnoticed, especially as business volume increases. He emphasizes the importance for companies to calculate the actual value of each client and ensure proper resource allocation.

"This is particularly common in new small businesses where customer profitability may not have been a priority initially," Sirsi states. "It's crucial to determine if you've started trying to please everyone, or if you've begun investing too much time in clients who aren't providing sufficient returns."

The analysis begins with calculating the actual price paid by subtracting all discounts and rebates from the initial invoice price. Next, the actual cost of service is determined, which includes fixed costs plus any additional services provided, such as customized reports or dedicated account management. Profitability is then calculated by subtracting the actual service cost from the actual price paid.

The final step in the analysis involves categorizing the customer base according to their profitability. This allows businesses to identify their least profitable customers and make strategic decisions, such as streamlining service processes or even re-evaluating client relationships. BDC aims to assist businesses in achieving a more sustainable and profitable operational model.