Technology and data science have made operational and customer data more readily available, yet there remain companies that don’t understand the “true profitability” of their customers and products.
Christopher Kernahan, Managing Partner, outlined in the Australian Financial Review how Pacific Consulting Group’s data-driven profit improvement approach using Dimensional Profit Models (DPMs) can help companies create this important understanding.
“We see companies, even today, using averages of averages as a means of allocating costs to customers and thinking that they have an accurate understanding of profitability,” he says.
“Your least profitable customer can be three to five times as unprofitable as the average profitable customer. It is essential to have visibility into this because otherwise a whole range of decisions – pricing, investments, marketing – will be based on flawed assumptions.”
PCG has developed a Dimensional Profit Model (DPM) – a successor to activity-based costing – that provides companies with a methodology to “cohesively integrate financial, operational and customer data”.
DPMs utilise the abundance of automated data from operational assets such as scanners, stores and processing equipment to generate detailed cost allocations for different activities. Profitability can then be understood by various dimensions, including customer, product, channel and geography.
John Stathis, founder and chairman of PCG, says PCG developed its DPM a decade ago when it was engaged by a company in danger of collapse.
“They had suffered a $50 million loss the year before and could not understand why. We built a DPM with them and it completely changed their perspective,” he recalls.
“Before the DPM they had focused on collecting data site by site, process by process. With the DPM connecting all these sites and processes into a single model we were able to demonstrate the full flow of customers through their operations and highlight the highly unprofitable segments that were driving them out of business.”
The insights formed the basis of a successful three-year turnaround program.
Read the full article here.