Customer profitability analysis (CPA)

Method of analyzing the profitability of company’s current customers. This can be done through activity-based accounting. The company estimates all revenues coming from the customer, less the costs. The costs should include not only the cost of making and distributing the product and services, but also such costs as taking phone calls from the customer, traveling to visit the customer, entertainment and gifts—all the company’s resources that went into serving that customer. When this is done for each customer, it is possible to classify customers into different profit tiers: platinum customers (most profitable), gold customers (profitable), iron customers (low profitability but desirable), and lead customers (unprofitable and undesirable).