Customer-Profitability measurement model: Activity-Based Costing approach

Abstract

This article proposes an activity-based costing model for measurement of customer profitability. According to proposed model, we should (1)divide the marketing activity as a part of the value chain into subactivities:(a) sales force training and education activity, (b)market research activity, (c)order acquisition activity, (d)order execution activity, (e)accounts receivable recovery activity, (f)after-service activity, and (g)supporting service activity. (2)(i)calculate the customer gross margin by using the “sales-cost of goods sold matrix”, (ii)apply activity-based costing(ABC) to the above subactivities to convert the resources consumed into activity costs by using the “resource-activity matrix”, (iii)complete the “activity-customer matrix” to assign activity costs to each customers　,and (iv)determine the customer profits by making the “customer profitability table”, and (3)derive generalized equations to get the customer profits. This model should be available for a company to manage marketing strategy and cost management effectively under the limited resources.