Do Customer Profitability Accounting and Analyses Provide Managers with new Decision Support? Evidence from Norwegian Fish Exporters

This paper has two purposes: (1) to study the relationships between subject ive and objective (cost-based) measures of customer profitability, and (2) to study managers’ collective cognitions of their customers’ profitability. Empiricaldata have been collected from four Norwegian fish exporters: (1) managers’ a priori subjective judgments of the profitability of customers, and (2) customer profitability accounts (not available earlier). This industry has a very high level of directly traceable costs (98.5 per cent) implying very low uncertainties in the measures of customer profitability. Associations between subjective and  objective measures of customer profitability measures are weak both regarding absolute and relative customer results. Managers have common perceptions with respect to customer profitability, however, not in accordance with the customer profitability accounts (CPA). Neither education nor experience can compensate for insufficient or missing customer accounts that provide reliableprofitability figures. Intuition may function best when “cornerstones” based on rational working methods are available for the decision makers. Thus, CPA provide managers with new decision support . The paper emphasizespractical implications regarding customer profitability accounting and management decisions

Can perceptual measures of customers profitability replace more objective ones?

Business performance is closely related to decisions. When making decisions, managers need reliable information concerning the decision situation, e.g. the profitability of orders, the profitability of customers, credit risks, etc. Empirical studies have disclosed that insight in this area to a large degree can be characterized as insufficient. Nevertheless, businessmen are frequently making decisions about exchanges with customers. When making such decisions they have some sort of conception of the decision situation. The focus of this working paper is the relationships between perceptual and objective measures of profitability of customers. The context is the order-handling industry; that is four Norwegian exporters of fish products and their customers. The main research question that is addressed is: Can perceptual measures of customer profitability replace more objectives ones? Furthermore, managers’ conceptions of the solvency of customers are compared with rating codes (credit reports) furnished by professional credit agencies: What relationships are found between the managers’ assessment of the creditworthiness of the customers of their company and the rating codes that are furnished by international credit agencies? Managers may have different educational backgrounds, different experiences, etc: In what extent does education or experience have any influence on the perceptions of the managers concerning the profitability and the solvency of their customers? Usually, the managers work close together and are sharing the experiences that they have concerning markets, customers, etc. Thus, it is a reason to believe that they have a common understanding concerning product markets, customers, agents, etc.: In what extent has the managers formed common perceptions (paradigms) concerning the profitability and the creditworthiness of their customers? The findings of the study are rather convincing. Neither the objective measures of customer profitability (absolute and relative customer results) nor the rating codes furnished by the international credit rating agencies, should be replaced by the perceptual measures of the managers. It is a reason to believe that the customer-related problems are so complex that there is a need for profound insight when judging the financial measures under consideration. Neither education nor experience (rules of thumbs) can compensate for insufficient or missing customer accounts that are presenting reliable profitability figures. Besides, it seems as if the managers of all of the four exporting companies have common perceptions or paradigms concerning customer profitability and customer solvency. Such common perceptions may often be looked upon as an advantage. But, of course, then the perceptions should be correct. Here the findings are so convincing that it may be asserted or at least questioned whether the perceptions are right. Thus, the only way of amending the situation of the decision makers, is to include customer accounting as part of the managerial information system of a business. Further managerial implications are discussed at the end of the working paper, Finally, some central problems and problem areas and suggestions for further research are presented

Does quality pay? : relationships between antecedents of customer satisfaction, customer satisfaction, customer loyalty and costomer profitability at the individual level

Superior quality is supposed to be positively related to superior business performances. This conception forms the cornerstone of Total Quality Management (TQM). At the individual customer level superior quality is supposed to be positively related to customer satisfaction, the key driver of customer loyalty and customer profitability. According to this way of thinking, the companies that are able to increase the level of satisfaction for their customers can in the long term expect a positive effect with respect to profitability. Nevertheless, only a few studies have examined the relationships between quality and profitability, and hardly any study has dealt with this relationship at the customer level. In this working paper the focus is on the individual customer with respect to the relationships between antecedents of customer satisfaction, customer satisfaction, customer loyalty and customer profitability. The following hypotheses are tested: H1: The higher the perceived quality for the customer tends to be, the higher is his (or her) satisfaction; H2: The more satisfied a customer tends to be, the higher is his loyalty; H3: The more loyal a customer tends to be, the higher customer profitability is obtained; H4: The more satisfied and loyal a customer tends to be, the higher is the obtained customer profitability. As expected, the findings (results) provide strong support for the four hypotheses. However, the relationships between the variables seem to be non-linear (increasingly downward sloping), and only valid beyond certain levels or thresholds. By segmenting the sample of customers into subgroups according to levels of customer satisfaction and customer loyalty, it is found that the customer with satisfaction and loyalty levels above the medians seem to be more preoccupied with quality than the rest of the customers. In addition, the estimates also suggest that these customers are much more profitable than other customers. Taking into consideration the high and conclusive statistical validity of the findings, there appears to be strong support for the “quality paradigm”. Thus, it may be asserted the “quality does pay”

Are loyal customers profitable? : customer satisfaction, customer loyalty and customer profitability at the individual level

Customer satisfaction is supposed to be positively related to profitability. This conception may be called “the paradigm of customer satisfaction”. Nevertheless, only a few studies have examined this fundamental relationship. Thus, evidence for this “much talked about relationship” is questioned. In this working paper the focus is on the individual customer with respect to the relationships between customer satisfaction, customer loyalty and customer profitability at the customer level. The following hypotheses are tested; H1 : The more satisfied a customer tends to be, the higher is the loyalty of the customer; H2 : The more loyal a customer tends to be, the higher customer profitability is obtained; H3: The more satisfied and loyal a customer tends to be, the higher is the obtained customer profitability. As expected, the findings (results) provide strong support for the three hypotheses. However, the relationships between the variables seem to be non-linear (increasingly downward sloping), and only valid beyond certain levels or thresholds. As long as customer satisfaction is not achieved without costs, the findings suggest that an optimal level of customer satisfaction may be estimated

Is customer profitability related to solvency of customers?

Firms have to consider various ways to analyse their business. However, by many firms it is often asserted that the customers are most important. The sales to customers are generating the cash flows that make the firms able to meet their financial commitments. Furthermore, without customer profitability a firm is not able to generate positive cash flows in the long term. Images of Customer Profitability (ICPs) may be divided into two groups: (1) descriptive; and (2) causal images. Previous to the discussion of the measurements of customer profitability (descriptive CPIs), there is a need for a theoretical understanding of this concept as well as some related theoretical elements or dimensions. These theoretical elements can be divided into four: (1) measures of profitability (i.e. relevant revenues and costs); (2) time; (3) uncertainty; and (4) context. The risk elements are usually divided into three main groups: (1) commercial risks, (2) economic risk, and (3) political risks. The focus of this working paper is on the commercial risks of companies with large exports, and in particular the financial capacity of their customers is addressed (i.e. their ability to pay). The solvency of customers or credit risks (rating codes) can be looked upon as one set of variables that are explaining variations in customer profitability. Furthermore, it can be assumed that the two concepts are closely related. The following hypothesis is tested; (H1): The higher the credit risk of a customer, the higher the relative customer result is obtained. As expected, the findings (results) provide support for this hypothesis, and this implies that the exporting companies may increase customer profitability by increasing the credit risks. Thus, the managers are confronted with the following decision situation: (1) Obtaining high customer results by accepting high risks concerning cash flows; or (2) obtaining lower customer results, with more secure cash flows. Further managerial implications are addressed at the end of this working paper. Finally, some central problems and problem areas and suggestions for further research are presente