|Type of paper:||Article|
|Categories:||Sales Strategic marketing Business strategy Customer service|
Sellers' standard lines of service and products are from the customers' perception considered as merchandises. It signifies that sellers must focus and distinguish deals, discounts, offers, and services presented to current clientele to realize success in growing and retaining them. This differentiation will assist in the acquisition of new customers based on the similarities with their profitable consumers and thereby replace the traditional mentality that all consumers are profitable. Therefore, organizations need to change their focus from product-based to customer-based (Hegner-Kakar, Richter, & Ringle, 2018). However, the majority of companies lack reliable managerial accounting systems that can give reports on client profitability which poses challenges in the verification of profitable from unprofitable customers. Increasingly, it is becoming more challenging in identifying which consumers to win back, grow, retain or criteria for acquisition of valuable customers.
With the change in focus from product-based to customer-based, business managers are seeking more information on customers and intangibles like customer loyalty. Even though marketing and sales units have suspicions over the existence of profitable and unprofitable consumers, they lack the necessary evidence to support their intuition (Hegner-Kakar et al., 2018). It is the management accountants who are better placed to access such evidence and avail it to marketing and sales, but the former is reluctant in reforming their measurement systems and practices, hence, unable to assist the latter. Furthermore, the sales force is motivated based on the revenues generated rather than from profitable sales. That should not be the case as it leads a company into valuing growth in sales and increased market share. Therefore, the adoption of a compensation model that combines profits and customer sales volume is highly recommendable.
Profitable vs Unprofitable Consumers
When the non-product costs to serve consumers who buy products of low-profit margin are added without considering the associated standard service lines and costs of product mix they buy, a company can consider these consumers as non-profit generating. On the contrary, clients who insist on additional services after purchasing product mix of high-profit margin are possibly non-profit generating. The presence of profitable and non-profitable consumers in every organization is undeniable (Plowman, 2017). For instance, low-maintenance "profitable" consumers make purchases without commotion, whereas high-maintenance "non-profitable" consumers insist on outstanding services and discounts like special delivery. The high-maintenance consumers regularly contact the company's customer service or return goods while the low-maintenance consumer contacts the seller on genuine cases of product fault which rarely occur.
There is an accumulation of the additional costs for the maintenance of non-profitable consumers. Nevertheless, when the profitability levels for all categories of consumers are evaluated, "profit margin management" methodologies can be applied to shift them all towards increased profitability. From a study on the application of administrative and selling costs to a product, it was noted that producers might undergo losses as a result of failure to manage regulatory and selling costs even after ensuring that all factory finances are entirely addressed (Ballings, McCullough, & Bharadwaj, 2018). Ideally, the principles applied in costing should be replicated in managing the administrative and selling expenses of production; a company may fail to capture benefits of competent low-cost production.
Addressing Profitability and Competitiveness
A good comprehension of a company's source of turnover, cost structure, and expenses is mandatory to establish its competitiveness. Such information can guide the actions relevant to enhance profitability. An example is the exploration of passive options of charging for the additional services rendered or raising the charges progressively to send the high-maintenance customers to the competitor (Ballings et al., 2018). Otherwise, the company might contemplate on the reduction of additional tasks for its workforce when attending to low-maintenance consumers through modifying consumers' habits with incentives that will enable the consumers to initiate less demand on the company. Besides, the company can restructure its process of delivery and subsequently reduce its employee's workload in attending to profitable consumers.
Activity-Based Costing (ABC)
The ABC is a technique that allows a company to track the utilization of its resource expenses precisely using an economic model. Through ABC, the company can trace its resource costs to products and to the variety of channels and consumer categories that add varying amounts of workload demand on the workforce. With ABC, companies should do away with the tendency of failing to assign non-traceable expenses to their sources (Kumar & Reinartz, 2016). The system enables increased precision when reporting as it obeys causality principle for cost utilization correlations. In companies with complex and intensive support, complicated tasks can precede a chain of direct jobs into the costs of the final objects. The sequences cause task-to-task expense assignments that depend upon everyday tasks expense drivers tracked to consuming jobs similar to the last cost objects that depend upon tasks expense drivers to reallocate expenses into final expense objects according to their differences and range.
With the ABC software, the challenge of converting indirect costs into direct costs is resolved as the integrated software permits standard direct costing to a native procedure. Moreover, the software permits the tracking of the expenses amidst the value of the final objects. Eventually, the integrated software reallocates 100 per cent of the resource costs into the ultimate accrued expenses of consumers, products, channels, service lines, as well as supporting business work (Ballings et al., 2018). Within the cost assignment network, the prominence of expenses is offered ubiquitously, inclusive of the manner that expenses are propelled by cost task drivers that comply with the correlation of cause and effect. The prominence of payments assists in the identification of focal areas for improvement.
The cost assignment network that comprises of modules linked by paths of cost assignment. The paths indicate the number of expenses passing through. With the ABC software, the paths to cost assignment track the expenses from their source to their destination. From the illustration, resources offer the existing capabilities to conduct work. Hence, resource costs may originate from the company's coffers as employee payroll and procurement purchases (Ballings et al., 2018). At this phase, where money exits the accounting in the form of electrical power, operating salaries, or remuneration. The drivers of resource costs are ascertained and evaluated as a measure of changing resource costs into task costs. Tracking or assignment of resource costs equates to the time that equipment or people devote to performing work tasks.
Employees are considered as assets as they perform work, converting resource into output in the module of work tasks. The task cost drivers are the measures taken to achieve the desired outcome from this project (Ballings et al., 2018). For instance, the number of pregnancy tests conducted in a hospital, or the quantity of inventory collected in a warehouse, or even the number of bank accounts opened.
At the bottom of the cost, network assignment is the cost of the final objects that is representative of the full diversity of services and outputs where expenses ultimately accrue. Consumers initiate the necessity for the supply of resource costs as they are the absolute cost objects. Nevertheless, there are tasks within companies that do not add to the quality, responsiveness, and consumer value directly (Plowman, 2017). The implication of such tasks is magnanimous as they cannot be decreased or eliminated without causing damage to the company. A case scenario is the preparation of regulatory reports that contribute nothing to customer satisfaction or the addition of product value. However, the preparation of such a report is invaluable to a company as it offers a legal mandate to conduct commerce. Such task costs are referred to as business sustaining costs and have to be added with the profits for the entire organization.
The Profit Cliff and Unrealized Profits
The profit cliff represented in Figure two is the accumulation of individual consumer's profit. In the graph, consumers are sorted starting with the low-maintenance to the high-maintenance. The representation depicts how a reasonable portion of the company's profits is masked as unrealized profits hidden due to inadequate costing under the gross profit margin line of the product. The unrealized profits can as well be hidden due to allocation techniques of incomplete current costs (Plowman, 2017). The ABC provides a profit and loss statement for each consumer together with categories of similar consumers. Several organizations depict the same trend displayed by the profit cliff. The trend displayed by the graph illustrates that, from right to left, the organization makes a remarkable profit from a small section of the consumers, a few lead to a breakeven point, and the remainder consumes the profits gained.
Customer Lifetime Value (CLV)
Most business-to-consumer organizations have consumers that undergo a life cycle path. Examples of such organizations are telecommunication and banking industries where there is a significant distinction between consumers who are potentially profitable in the future and those that are profitable presently. This variation swings the focus from the present profit margins to future expected profit margins (Plowman, 2017). Accountants from these business-to-consumer organizations can efficiently compute individual consumer's customer lifetime value prior and after different marketing efforts and targeted deals and offers. Therefore, the marketing and sales units can evaluate which consumers have the potential to attain increased profitability from tasks.
Shifting Consumers to Higher Profitability
Figure three demonstrates two tiers of a "coated" utilization chain of expenses in the bottom final objects cost component. Ultimately, the final objects cost indicate the consumer utilizing the entire final objects cost leaving behind the costs of sustaining the business only (Kumar & Reinartz, 2016). From the illustration, each of the final objects cost classes such as consumer, service line, and supplier has an independent cost of sustenance. These sustaining costs can be assigned to the end-user or end product employing an object cost driver to mirror the various utilization correlations.
The ABC profit and loss statement provide managers with the ability to evaluate separate service lines and products bought in profound detail. The details encompass the mixture of low and high-profit margin product procurements, as per their prices and unit costs. Moreover, the managers can as well mine data concerning the profit margins of the product mix for more clarity. The user can also assess the cost of the work tasks, content, and materials for individual service line and products (Kumar & Reinartz, 2016).
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