Industrial Marketing Management 32 (2003) 573 – 583 The


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The purpose of this assignment is to be able to critique a research article including critically examining its strengths and weaknesses, internal and external validity, and where appropriate, reliability and validity of measures. Raaji et al., 2003, The implementation of CPA.pdf Industrial Marketing Management 32 (2003) 573 – 583 The implementation of customer profitability analysis: A case study Erik M. van Raaija, Maarten J.A. Vernooijb, Sander van Triestc,* a Cass Business School, City University, 106 Bunhill Row, London, EC1Y 8TZ, UK b Stinus Blomlaan 19, 3953 CB Maarsbergen, The Netherlands c School of Technology and Management, University of Twente, P.O. Box 217, 7500 AE Enschede, The Netherlands Received 1 November 2001; received in revised form 1 September 2002; accepted 1 November 2002 Abstract By using customer profitability analysis (CPA), firms can determine the profit contribution of customer segments and/or individual customers. This article presents an approach for the implementation of CPA. The implementation process is illustrated using a case study of a firm producing and selling professional cleaning products. The case study highlights specific issues related to CPA in an industrial setting, and the results provide examples of the possible benefits of implementing a process of regular CPA. D 2003 Elsevier Science Inc. All rights reserved. Keywords: Customer profitability; Customer relationship management (CRM); Implementation; Case study 1. Introduction Within any given customer base, there will be differences in the revenues customers generate for the firm and in the costs the firm has to incur to secure those revenues. While most firms will know the customer revenues, many firms are unaware of all costs associated with customer relationships. In general, product costs will be known for each customer, but sales and marketing, service, and support costs are mostly treated as overhead. Customer profitability analysis (CPA) refers to the allocation of revenues and costs to customer segments or individual customers, such that the profitability of those segments and/or individual customers can be calculated. The impetus for the increasing attention for CPA is twofold. First, the rise of activity-based costing (ABC) in the 1990s led to an increased understanding of the varying extent to which the manufacturing of different products used a firm’s resources (Cooper & Kaplan, 1991; Foster & Gupta, 1994). When using ABC, firms first identify cost pools: categories of activities performed within the organization (e.g., procurement). For all cost pools, cost drivers are identified: units in which the resource consumption of * Corresponding author. Tel.: +31-53-489-4545; fax: +31-53-4892159. E-mail address: s.p.vantriest@sms.utwente.nl (S. van Triest). the cost pool can be expressed (e.g., number of purchase orders). Costs are then allocated to cost objects (e.g., products) based on the extent to which these objects require certain activities (measured in cost driver units). Once it became accepted that not every product requires the same types and same levels of activities, it was a small step to see that customers, too, differ in their consumption of resources. The size and number of orders, the number of sales visits, the use of helpdesks, and various other services can be very different for each customer. Consequently, some customers incur more relationship costs than others, leading to different levels of customer profitability. Although this has long been recognized, it fits better in the logic of ABC than in the traditional costing systems. Second, information technology makes it possible to record and analyze more customer data—both in type and in amount. As data such as number of orders, number of sales visits, number of service calls, etc. are stored at the level of the individual customer, it becomes possible to actually calculate customer profitability. It is co

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