I was absolutely floored by the promotion AMAZON.COM sent me earlier this week…you see, I purchased a HD-DVD player from AMAZON about a year ago.  Toshiba's HD-DVD format recently lost the war to Blu-Ray and is now obsolete.  Soon after NETFLIX and BLOCKBUSTER announced they would no longer offer HD-DVD titles I listed my $299 player on eBay and managed to get $75.00 for it.  AMAZON took some responsibility for my 'loss' by offering a largely unrestricted $50.00 credit on anything they sell.  An amazing stroke of customer relationship genius, if you ask me.  Sure, $50.00 is a lot of money .. but it's going to buy a lot more than $50 in loyalty (certainly from me).

Dear Amazon.com Customer,

As someone who purchased an HD DVD player from us before February 23, 2008,* you might like to hear about a special offer available from Amazon.com.

New technologies don't always work out as planned. We at Amazon.com value our customer relationships more than anything and would like to support customers who purchased these players by offering a credit good for $50 off any products sold by Amazon.com.** Just use promotional code DHA8-HKVVYZ-????? when checking out. The code is valid through April 9, 2009, so you have plenty of time to use your credit. Purchases from third-party merchants on our site are not eligible.

In addition, we'd like to share some of our top offers on Blu-ray discs, HDTVs, and other high-def technology and remind you that the Amazon.com Marketplace is available to sell items you might not want anymore as you upgrade to new ones. Also be sure to check out our monthly Amazon.com Early Adopters Delivers e-mail to find out about the latest technology.

This may be a retailing first, viz. offering a customer a substantial credit on account simply because a technology they sold lost out in the end. 

Remember when AMAZON was chided for consistently failing to show a profit early on?  He who laughs last, laughs best.  This great company continues to shine.  My hat's off to them!

// lm 

Posted by Lloyd Merriam | No Comments »

I came across an interesting article titled "Solving the mystery of customer lifetime value," by Brian Plowman of Develin Partners (based in the UK).  He makes a convincing argument that while most companies focus on revenue, customer count and gross margin to assess profitability, that a more rigorous ABC (Activity Based Ccosting) approach can paint a very different and sobering picture indeed. 

Because I had some trouble understanding the graph presented in the article [see below], I wrote to Brian asking for clarification.  He wrote back with a much appreciated explanation of the "hook curve" as he calls it — including additional exhibits and case studies of how Develin's ABC costing approach can reveal the sad truth about the lack of profitability in what might otherwise appear to be a thriving business. 

Brian argues convincingly that the profitability of [virtually] all companies is represented in some form of the hook curve.  Moreover, he reveals that a surprising - if not frightening - number of customers are often found to be unprofitable when the true costs of delivering the company's products and/or services are taken fully into account.

Here first is the original graph from his article (viz. the graph I had trouble understanding)..

Trying to determine precisely what each axis represented left me dazed and confused.  But a different exhibit, following our email exchange, made things much clearer…

In this example, roughly 40% of customers prove to be unprofitable following an ABC analysis.  This group erodes the overall profitability of the business due to the high cost of servicing their accounts.  The next step is to determine why these customers are unprofitable and to look for ways to reverse that trend — ultimately either by lowering costs or raising prices.  For example, some customers may be receiving service(s) at a higher cost to the company than the norm.  Special orders and rush deliveries, for instance, would increase the cost of fulfillment and consequently could make a given sale unprofitable.  A customer who atypically and routinely drains a companies resources beyond the norm might prove quite unprofitable in the final analysis.

Brian also provided some examples from his consulting practice that drive the point home even more ..

Finally, here's another representation of the hook curve which I think helps to bring the matter even more clearly into focus.

 

       I think there's considerable merit and food-for-thought to be found in this ABC costing approach to profitability analysis.

// lm 

Posted by Lloyd Merriam | 2 Comments »

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