Profitability is one of the most significant measures to evaluate the success of any business. Understanding the profitability of significant customers or markets, helps decision makers identify strategic paths for profitable opportunities.
A profitable customer is a person, organisation, business or company that over time yields revenue that exceeds, by an acceptable amount, the cost of attracting, selling and servicing that customer.
A profitable market is a market for the business that over time yields revenue that exceeds, by an acceptable amount, the cost of attracting, selling and servicing the group of customers with which they trade within that market.
The challenge of any profitability analysis is to find a way of allocating the indirect costs to the significant customers or markets. To allocate indirect costs fairly, the key drivers for those costs need to be identified.
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