A Balanced Scorecard Approach to Measure Customer Profitability

A Balanced Scorecard Approach To Measure Customer Pr...

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RESEARCH & IDEAS

A Balanced Scorecard Approach To Measure Customer Profitability

Published: August 8, 2005 Author: Robert S. Kaplan

The Balanced Scorecard introduced customer metrics into performance

management systems. Scorecards feature all manner of wonderful objectives relating to the customer value proposition and customer outcome metrics—for example, market share, account share, acquisition, satisfaction, and retention. Yet amid all these measures of customer success, some companies lose sight of the ultimate objective: to make a profit from selling products and services. In their zeal to delight customers, these companies actually lose money with them. They become customer-obsessed rather than customerfocused. When the customer says "jump," they ask "how high?" They offer additional product features and services to their customers, but fail to receive prices that cover the costs for these additional features and services. How can companies avoid this situation? By adding a metric that summarizes customer profitability. Consider the situation faced in the 1990s by one of the nation's largest distributors of medical and surgical supplies. In five years, sales had more than tripled to nearly $3 billion, yet selling, general, and administrative (SG&A) expenses, thought by many to be a fixed cost, had increased even faster than sales. Despite the tripling in sales, margins had declined by one percentage point and the company had just incurred its first loss in decades. Rather than SG&A costs being fixed or even variable, these costs had become "super-variable."

Executive Summary:

Happy customers are good, but profitable customers are much better. In this article, professor and Balanced Scorecard guru Robert S. Kaplan introduces BSC Customer Profitability Metrics. From Balanced Scorecard Report.

About Faculty in this Article:

Robert S. Kaplan is a...