Third-party logistics warehousing is an excellent way for manufacturers to save money. But the question remains: How can 3PL warehouses calculate customer profitability? Read on to learn more.
What Is Customer Profitability?
The ability of a company to produce goods and services using available resources is called customer profitability. Calculating the profit made per customer allows you to determine which customers are most profitable.
You should compare the total number of transactions you calculated. This will assist you in determining which customers bring in more money than they cost you. Here is a quick read!
Calculate Your Warehouse Costs for Each Customer
- It would help if you calculated the cost of your employees’ time.
- Calculate the cost of your forklift operators’ time.
- Estimate the cost of running your equipment, including fuel and maintenance.
- It is best to estimate how much you pay in rent or mortgage on your warehouse facilities.
- Estimate the cost of insuring your company’s assets against theft or damage.
- Ensure coverage for employees who work outside of their regular hours.
- Estimate the utilities required to run a 3PL facility at total capacity.
Determine what part of the cost to assign to each customer
The first step is to figure out how much of the expense each client will bear. This can help you distinguish between fixed and variable rates. Labor costs, for example, are often considered fixed.
To make these calculations work, link all charges to a specific client. Otherwise, you’d have no way of knowing who was to blame because you paid for them!
Calculate the Value of Adding a New Customer
The profit you make from a new customer is the value of that customer. As a result, several methods for calculating your customer’s profitability. Subtracting the acquisition cost from your profit margin is the most popular way.
The amount spent on Google Ads is equal to the acquisition cost. Advertisements in local newspapers or magazines providing money-back guarantees are among the others. Customer dissatisfaction is like refund requests from disgruntled customers.
Calculate the Opportunity Cost of Keeping an Unprofitable Customer
The potential cost exceeds the time and resources invested in providing services. It also contains the amount of space that customers occupy in your warehouse. For instance, assume you have a lot of free space. In that case, It’s not a big concern if you keep an unprofitable customer around in that circumstance. Therefore, you can store them until they become profitable again. Not that having an unprofitable customer means you can’t have anymore.
Calculating this step isn’t always straightforward. So, it is necessary since it ensures that every move made by 3PLs maximizes earnings. Operations management, sales, marketing strategy, and product development are all included. Any extra primary business function can be included.
Conduct Customer Profitability Analysis Regularly
To ensure that this report is correct, consistency is required. You should also ensure that your information is current and valuable. As a result, we recommend running this report frequently.
Quarterly reports enable you to track your progress with the same clientele. This makes it easier to see how well you perform on each account. It also allows more sophisticated analyses, such as client lifetime value (CLV).
Semi-annual reports show patterns over months or quarters. This helps you determine which techniques are most effective for specific clients. Then, you can repeat the process with different accounts in the future.
Annual reports allow for more detailed comparisons and analyses. So, you can do it at any time during the year. This will enable you to see their impact on client profitability.
Defining a Profit Centre
A profit center is a revenue-generating business unit. Therefore, It also has expenses and profits—associated with profit centers. You’ll need to identify your company’s profit center structure. This should not come before you assess client profitability.
For instance, Ford Motor Company is an excellent approach to how this works. The automotive division and the truck division are two different profit centers. And each division has its own sales force, marketing department, and production facilities.
How to Determine Cost per Order
A 3PL warehouse’s cost per order calculator is an essential tool. It can give you an idea of how much each customer costs your company and help you determine which customers to engage with and which to avoid.
To figure out how much it costs for every order, make a list of all your services. You should also be aware of the price. Add these costs together and divide by the total number of orders received. We can now compute our cost per order:
Order Cost = ($350 + 150)/100 = $3.50 Total Cost / Total Orders = Cost Per Order
Performing a Competitive Analysis
Customer profitability requires an understanding of your competition. Looking at your competitors’ strategies can teach you a lot about them. Pricing, product options, and strengths and shortcomings are examples. So, It would help if you also considered the following factors:
- Recognize the Market
- Know where you stand in the market.
- Recognize your customer and be aware of your competition.
- Calculate the service cost.
The service cost also tells you how much a particular consumer costs you. It’s the sum of the labor, materials, and equipment required to complete an order.
Consider the average number of hours each employee works per week. This entails dealing with paperwork as well as packing and shipping orders. Other responsibilities include driving trucks and other delivery-related tasks. Then add up all the accompanying costs, such as wages, bonuses, and perks. Besides, taxes paid on behalf of employees are another thing to report. Insurance prices, too. It’s also good to factor in equipment upkeep and vehicle lease payments.
Add up all the direct material costs incurred during fulfillment. This could include transportation companies’ freight rates. Include any extra packing supplies that were purchased for each order. This is because they are not offered for free.
Customer profitability data are crucial for 3PLs. This helps them customize their services for individual customers. As a result, it assures their happiness and improves the quality of services. For more details, contact sales support.