Marketing channels must be cost effective. To achieve optimum cost effectiveness, companies need marketing channel structures that service end users through the most efficient channels.
Many companies have considerable scope to improve performance by an understanding of the real profitability of individual accounts and identifying factors that influence channel profitability. The analysis is by way of a channel profitability model.
Customer and reseller profitability is commonly equated to gross margin generated. This is over-simplification which distorts marketing channel decision making.
Companies need profitability models that reflect the actual cost of transacting business. Modern accounting systems and concepts can now provide detailed and accurate information on specific marketing channels, opening the way for individual profitability models.
Without such models it is impossible to:
The price of goods and services can be simplistically broken down into four key components:
Measurement of account profitability by gross margin ignores the increasingly high percentage of indirect and overhead costs and fails to recognise different cost linkages.
Traditionally, businesses have considered indirect and overhead costs as fixed and:
However the above ignores:
As a result, customersí accounts may not generate sufficient contribution to cover their variable indirect cost or appropriate share of overheads.
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Constructing an Account Profitability Model
An account profitability model is built by identifying:
And constructing an end user profit and loss account for each channel. Key revenue and cost influencing variables are:
Revenue Influencing Variables Cost Influencing Variables
Products purchased number of orders
Pricing delivery frequency
Discount structure delivery distance
Average order value
Type of sales representation
Each variable then generates a revenue or cost within the model by reference to a series of revenue and cost factors allowing account profitability to be calculated.
Areas of Account Profitability Model Impact
Account profitability models are a tool for creating profit optimisation. They give organisations a tool to focus on where the greatest impact on profitability can be made and can assist management to optimise both intra and inter channel profitability.
A. Optimisation of intra channel profitability
Account profitability models impact on intra channel profitability by allowing:
B. Optimisation of inter channel profitability
In most multi-channel distribution environments, the marketing channels used by end users are typically determined by a combination of factors:
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Account profitability models facilitate the optimal allocation of accounts among channels by:
When key profitability determinants have been identified, the customer account base can be segmented to facilitate reallocation among channels.
Reallocation of accounts is also dependent upon external factors such as the strength of existing channel ties and the cost of account transfer. The complete process is set out in Chart 2.
Chart 2: Inter Channel Profit Optimisation Process
The model can also be used to:
SummaryAccount profitability models are invaluable for companies seeking to improve their marketing channelsí performance. It is possible to improve profitability within existing channels and identify those channels where individual or groups of accounts are most profitable. Although there are limitations on the practical reallocation of accounts among channels and the ability of companies to influence the purchasing behaviour of customers, the potential gains in profitability are considerable.