1. The Principle of Customer Cost Variations
Not all revenue is equally profitable. Two clients can generate identical sales volumes while demanding completely different levels of operational support. Customer Profitability Analysis (CPA) traces hidden overhead costs (such as rush deliveries, custom packaging, or constant customer service calls) directly to individual clients to measure their true profitability.
2. Constructing a Customer Cost Hierarchy
To allocate overheads to clients accurately, management accountants build cost frameworks based on activity-based concepts:
- Order-Level Costs: Expenses driven by individual transactions, such as invoice processing or delivery packaging.
- Customer-Level Costs: Expenses tied to maintaining a client relationship, independent of order volumes, such as sales visits or custom tech support.
- Market-Level Costs: General overhead costs incurred to support an entire sales channel or region.
3. Visualizing Profits: The Stobachoff “Whale Chart”
A Whale Chart plots cumulative customer profits as a percentage of total corporate earnings, with clients ranked from most profitable to least profitable along the horizontal axis.
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- The Rising Peak: The most profitable 20% of clients typically generate up to 150% to 200% of the company’s total net profits. They buy high-margin products and demand minimal extra support.
- The Flat Plateau: The middle 60% of clients hover around break-even, contributing just enough to cover their direct costs.
- The Dropping Tail: The least profitable 20% of clients consume massive amounts of custom engineering, emergency delivery, and administrative support, which wipes out a significant portion of the profits earned from the top tier.
Using this analysis, management can take targeted action: renegotiate prices with unprofitable clients, streamline support processes, or fire clients who drain company resources.
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