Customer Profitability in a Supply Chain

Abstract

Estimating current profitability at the individual customer level is important to distinguish the more profitable customers from the less profitable ones. This is also a first step in developing estimates of customers' lifetime values. This exercise, however, takes on additional complexities when applied to an intermediary in a supply chain, such as a distributor, because the costs of servicing a retail customer include not only those incurred directly in servicing this customer but also those incurred by the distributor in dealing with its own vendors for goods supplied to this customer. The authors develop a general model and measurement methodology to relate customer profitability to customer characteristics in a supply chain. The authors show how heterogeneity in customer purchasing characteristics leads to important profit implications and illustrate the implementation of the methodology using data from a large distributor that supplies to grocery and other retail businesses.