Abc-Customer Typology

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When companies apply ABC to their customers, they can view them through the lens of a simple 2 x 2 diagram.

The vertical axes shows the net margin earned from sales to the customer.

The net margin equals net prices, after all sales discounts and allowances, less manufacturing cost (as measured by ABC, of course)

The horizontal axis shows the cost of serving the customer, including order-related costs plus the specific customer-sustaining marketing, technology, selling and admin expenses associated with serving each individual customer, as measured by ABC

This diagram shows that companies can enjoy profitable customers in different ways. Some customers may be simple to serve, but may also demand low prices. In this case, net margins are low, but by working closely with its suppliers, the customer reduces the costs to serve it.

Customers in the upper left-hand quadrant generate high margins and have low cost to serve.

They should be watched closely as they could be vulnerable to competitive inroads.

Managers should offer discounts or especial services to retain the loyalty of this highly profitable customers if a competitor threatens.

Those customers located in the lower right-hand corner are the MOST INTERESTING (Low margins and high cost to serve).

Co can use the bill of activities and Net margin and cost-to-serve ABC calculations to modify relationships with such customers and move them in northwest direction. = TOWARDS BREAK-EVEN AND PROFITABILITY.

FOR EXEMPLO THE BILL OF ACTIVITIES MAY REVEAL THAT SOME OF THE COMPANY’S INTERNAL PROCESSES ARE QUITE COSTLY AND INNEFICIENT AND ARE LEADING TO MANUFACTURING COST OR HIGH COSTS TO SERVE.

OR IT MAY WELL BE THAT THE HIGH COST TO SERVE IS CAUSED BY CUSTOMER ORDERING PATTERNS: UNPREDICTABILITY, CHANGES, EXCESSIVE FREQUENCY, CUSTOMIZED PRODUCTS, NONSTANDAR LOGISTICS AND DELIVERY REQUIREMENTS, LARGE DEMANDS ON TECHNICAL AND SALES PERSONNEL.

THE FIRST ACTION SHOULD...