From Activity Based Costing to Customer Value Management
More insight into the costs and revenues surrounding your product or service? Zooming in on the details per product or service is a challenge that companies have been dealing with for some time. Let alone understanding profitability at the customer level. In this article, we show that it is not as complicated as it seems.
How do you gain insight into the costs and revenues surrounding your product or service? Zooming in on the details by product or service is a challenge that companies have been dealing with for some time. Let alone understanding profitability at the customer level. Activity Based Costing has been the preferred method for understanding product-level costs. However, despite its potential, many companies are finding it challenging to apply this method of cost reporting. Now that large amounts of data are easily accessible, and software has gotten better, you can create an increasingly detailed picture. In fact, technology is moving so fast that a new approach is emerging: Customer Value Management (CVM). What exactly does this transition from ABC to CVM entail? And what does it mean for your organization?
From Activity Based Costing to Customer Value Management
Zooming in on the details for each product or service will get you a lot. With a well-founded understanding of costs and revenues, your company can make better decisions and improve results. Think for example about reducing costs, improving margins or increasing product profitability.
More insight into costs with Activity Based Costing
One of the most popular solutions for understanding costs is Activity Based Costing (ABC). This was devised by Robin Cooper and Robert Kaplan. This method focuses on allocating indirect costs to activities, products and services. The goal is to create a detailed picture of cost prices. With these insights, you can make stronger fact-based decisions at the strategic level as a company. In addition, you can use a method such as Lean Management or Operational Excellence, for example, to gain insight into the process steps that have the most impact on the cost price and you can start optimizing these processes.
Time-driven Activity Based Costing (TDABC).
TDABC is a variant of Activity Based Costing developed by Kaplan and Anderson. Whereas ABC focuses on allocating costs to activities based on various cost drivers, TDABC uses time as the main allocation factor. It calculates the cost of activities based on the time required and takes into account the cost of resources used during that time. In the article "Time-Driven Activity-Based Costing," Michael Cobey discusses the topics of TDABC and ABC.
Does Activity Based Costing deliver enough?
As an added depth to understanding cost, you also want to know the returns on the costs and investments you make as a business. The costs can be as low as it is. If it yields nothing, you have to ask yourself whether you are doing the right things. By comparing the revenues and costs, it becomes clear whether what you are doing really pays off and where you add value as a company. For example, a company can begin to ask itself whether the revenues from certain marketing activities outweigh the investments required for them? The answer to these kinds of questions is the starting point for improving your company's performance and added value.
Understanding indirect costs as well as revenues
Despite the potential of Activity Based Costing, many companies experience difficulties in relating (in)direct costs to activities. In order to allocate these (in)direct costs correctly, a large amount of data is often needed. Or estimates are made. The latter makes ABC models not always transparent. It must also be clear which processes take place per activity. This applies not only to costs, but also to revenues. It is relatively easy to know what revenue a sale generates. However, it is more difficult to relate sales to a marketing activity.
The move to Customer Value Management
But there is light on the horizon. New technological developments and knowledge are making it increasingly easy to gain more insight into your performance. Specific software, such as SAP PaPM or Oracle EPCM helps analyze costs per activity, sales channel, customer, product or service. So time for the next step in cost-management maturity: Customer Value Management (CVM).
Improve customer returns
The big difference between Activity Based Costing and CVM? CVM goes beyond just providing insight into costs, because with CVM you not only analyze financial data. But also operational data or even demographic or behavioral data of your customer. By connecting these different types of information in a smart way, this approach creates new insights into costs and revenues at the customer level. But also the value of your customer. All this to influence the profitability of your customers and related services and products at the customer level.
Starting with Customer Value Management?
Do you also want to make the move to CVM? In our webinar "the 7 steps to understanding customer profitability" we take you through our roadmap to gain insight into the profitability of your customers. And we discuss the 7 steps to gain insights that will help your organization make the right strategic decisions. Watch this link to replay this webinar immediately!
