The Need for Profitability Management
Profitability management is an analytics-driven business discipline designed to enable organizations to achieve their market share and profitability objectives. Effective control of profitability at a granular level (such as by customer, product or channel) makes it possible to achieve some combination of higher profit margins and increased market share. Companies that fully understand their economic costs, which are broader than their accounting costs and include the cost to serve individual customers through specific channels, are better able to control those costs. Consequently, they can choose to price for higher profitability, or they can implement targeted price-based market penetration strategies. They can do so because they can establish prices and set the terms of sale with greater knowledge of the impacts of each. Profitability management analytics also can yield a forecast of what is likely to happen, making it possible to identify future profitability issues and opportunities and how they might be addressed.
Profitability management achieves these objectives by analyzing and accurately defining all significant profitability drivers from multiple perspectives such as product profitability, customer profitability and channel profitability. But most organizations’ profitability management capability is quite limited. Our Office of Finance benchmark research found that just 30% of companies manage product profitability—and 25% manage customer profitability very well.