Most companies today understand the source of their revenues. Unfortunately, they do not understand the source of their profits. Often, attempts to measure profitability center on either product costs alone or on profitability at the business unit or enterprise level. These attempts ignore all other components of the company’s costs. Other companies have attempted to determine customer profitability based on indirect cost allocations. These attempts are at best unsuccessful and at worst can be severely misleading. The averaging and allocating of costs tends to make unprofitable accounts look more profitable and makes profitable accounts appear less so. What companies fail to do is measure profit at the most meaningful and controllable level, the customer level. Understanding the underlying components of cost and addressing specific causes of poor profitability will significantly improve bottom-line performance.

Understanding profitability sources and cost drivers associated with individual accounts can be a market advantage. This analysis will identify profit-improvement opportunities that will immediately add to your bottom line. You identify those areas where you are the most successful and therefore develop your strategy from a position of strength. You identify areas of poor performance that can be addressed, and you can stop wasting resources on unprofitable areas. Our experience has shown that undertaking an account profitability improvement initiative can improve a business’ overall.
Undertaking an account profitability improvement initiative is a five-step process:

• Costing System — a product costing system that fully and accurately assigns product costs must be implemented.
• Profitability Modeling — all costs associated with individual accounts are identified and assigned to specific accounts.
• Profit Improvement Planning — Account-specific action plans are prepared and executed for accounts with poor profitability.
• Strategic Planning — the results of the profitability analysis are used to identify those areas where the company should focus its resources.
• Ongoing Systems — It is important to assure that the account profitability process becomes institutional and not simply a one-time event. This requires an ongoing profitability-monitoring system as well as a new account pricing system.