Not all customers are equally profitable. Different customers have different needs, and hence different costs to serve. The overall profitability of a business is a function of the profitability of individual customers and customer groups.

Many businesses measure customer satisfaction but they do not measure customer profitability. A profitable customer is a buyer who yields a revenue stream which exceeds by an acceptable amount the costs incurred to serve that customer. Customer profitability can be measured individually by customer, market segment, or channel. This article looks at an approach whereby customer profitability can be measured at the market segment level.

Unfortunately, most businesses are poorly equipped to understand how costs relate to specific customers. Traditional approaches to accounting allocate costs to individual products, but not to customers, who are the drivers of these costs. While the average costs in a business may decline as volume increases, there can still be significant profit leaks due to the higher costs involved to serve some customers.

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