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Customer Economic Profitability

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I'm looking for guidance on how to estimate customer economic profitability for a business that is not yet tracking costs or expenses to the activity level.

Here's the problem and questions:

A small business owner has 1,000 customers in his customer base. The owner wants to identify "profitable" and "unprofitable" customers in order to improve business performance. However, the business only tracks general expenses related to the acquisition and support of each customer. The owner has asked how he might be able to reasonably estimate the economic profitability of each one of his 1,000 customers. He needs to set up an Excel worksheet to help him quickly complete this task for each customer in the customer base.

1. How could this owner reasonably estimate and identity (a) the average economic profit and (b) the economic profit of each customer?

2. What should he use for a cost of capital charge (and why)?

3. What would he need to do to set up the Excel worksheet?

Thank you.

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The expert estimates customer economic profitability for a business.

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A small business owner has 1,000 customers in his customer base. The owner wants to identify "profitable" and "unprofitable" customers in order to improve business performance. However, the business only tracks general expenses related to the acquisition and support of each customer. The owner has asked how he might be able to reasonably estimate the economic profitability of each one of his 1,000 customers. He needs to set up an Excel worksheet to help him quickly complete this task for each customer in the customer base.

1. How could this owner reasonably estimate and identity (a) the average economic profit and (b) the economic profit of each customer?

The average economic profit is the difference between the average revenue charged per customer and the ...

Solution provided by:
Chidi Ngene, M. Sc.
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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