Mobilizing customer profitability analysis in service organizations: A case study
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School of Business |
Master's thesis
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Date
2024
Department
Major/Subject
Mcode
Degree programme
Accounting
Language
en
Pages
77
Series
Abstract
Customers contribute to a company’s overall profitability differently due to differences in their needs, behavior, and preferences. The prevalent trend of increased customer orientation has led companies to customize services and products according to the needs of customers. However, if customer profitability is not measured and managed it can lead to a situation where better customer satisfaction is aimed but profitability is neglected. For the service organizations customer profitability is an even more important measurement because customers actively participate in the service production process which increases the variability and unpredictability in the process. However, calculating customer profitability is not a straightforward process because all costs cannot be traced to customers directly, but part of the costs should be allocated to customers using a cost accounting method. It has been claimed that more sophisticated cost accounting methods such as activity-based costing would be the most suitable method to allocate costs to customers because it succeeds in capturing the cost differences that are incurred due to differences in customer behavior. When the costs are allocated to customers it reveals which of the company’s customers are profitable and which ones are unprofitable. This information can be utilized by managers to support decision-making. Despite the importance for service organizations to measure and manage customer profitability it is not widely researched in the context of the service sector. Several authors have researched implementing customer profitability analysis using activity-based costing, but the other areas remain insufficiently researched. Thus, this thesis aims to expand the understanding of how in service organizations customer profitability is calculated and how this information is utilized to manage customers and their profitability. Moreover, it aims to identify the factors preventing and facilitating organizations in mobilizing customer profitability analysis. To get empirical evidence qualitative case was conducted in a multinational professional service organization. The findings of this thesis illustrate how in service organizations, particularly in professional service organizations where most of the costs come from direct labor costs less sophisticated cost accounting methods can be used to allocate costs to customers. Secondly, the results indicate that customer profitability information is utilized in various situations for example to support pricing, segmentation and customer relationship acquisition and termination decisions. Competing priorities, individual attitudes and insufficiencies in reporting for example are considered as preventing factors whereas facilitating factors include factors such as alignment with target and compensation and top management support.Description
Thesis advisor
Vaivio, JuhaniKeywords
customer profitability analysis, cost accounting, activity-based costing, service sector