Using ABC to increase revenues

Most organisations rank finding new customers and markets as more important than cost-cutting. Yet this also requires good cost information.

Finding new customers and markets costs money and it is very important to target the most profitable strategic customer groups (by lifetime value) and most profitable markets. Identifying where profitability comes from requires a good understanding of the existing cost base and the key cost drivers so that economies of scale can be maximised and high cost activities minimised.

Many companies are losing money on products or customer groups because they are blissfully ignorant of the relationship of the price and true cost of their products. Using traditional costing techniques to determine the real cost of complex products with high handling costs or custom tailoring is difficult.

CEOs want customers they can build sustainable, profitable relationships with. That means they need better understanding of the markets; better understanding of which are the profitable customer relationships and what their needs are; better, more targeted propositions and better understanding of their investment in sales and marketing.

Activity Based Costing (ABC) linked with a good funds transfer pricing system can provide greater understanding of customers, which will improve marketing effectiveness. It will provide information showing how much it costs to acquire and retain each customer and how much can be generated from each product for that customer. This is quite different from the simpler, easier, and largely inaccurate method known as cost allocation.

With ABC, the cost of each customer related activity can be estimated. Since each customer activity is recorded, then attributed its cost, by linking activity costs to net revenue streams it is easy to figure out the total profitability of each customer.

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