Customer Profitability Accounting

Customer Profitability

Required: Given the preceding information, which customer types would you expect to be the most desirable or profitable, the next most profitable, and so on for the credit card company on a long-term basis?

Ranking:

1. “Carries a high balance; pays only the minimum required payment but pays regularly with occasional late payment” This type of customer is the most profitable for the insurance card industry due to the fact that because they carry a high balance interest is charged on the balance every month and not only they are paying an interest, the credit card industry changes the rates. For example the credit card is open with a 9.9% rate however, they can change the rate if you are late to a 24.9% and thus the customer is being charged 24.9% on the high balance. The credit card industry also charges a late payment fee of around $29.00 to $35.00 dollars. This is the type of client that the credit card industry is most profitable with. In a long term basis this is the type of customer the credit card company wants to have.

2. “Carries a high balance; pays at least the minimum required payment but does not pay in full and always pays on time.” This type of customer would be the second most profitable due to the fact that carries a high balance and thus is being charged a high interest on that balance every month and continue to generate profit in a long term basis.

3. “Carries a low balance; pays at least the minimum required payment but does not pay in full and always pays on time.” This type of customer I would rant as 3rd of most profitable due to the fact that the credit card company is always charging interest on the balance.

4. “Charges a large dollar volume on purchases; pays in full and on time each month.” This customer would rank number 4 in customer profitability due to the fact that the merchant will pay the credit card company a percentage of the dollar sales on each credit card transaction. Since the customer...