The acronym CPA, in this case, stands for Customer Profitability Analysis. Many businesses have customers who take advantage of them, to the detriment of other good customers. To understand CPA the entrepreneur needs to understand the concepts of direct and indirect expenses. Direct expenses equate to the cost of goods sold (COGS) and any labor directly billable to the customer. Indirect expenses are all the expenses that occur and are not directly billable to the customer, such as rent, loan payments, and overhead labor.
Good customers cover all direct costs and their share of indirect costs, plus they contribute to the company’s profits. Laggard customers cover all direct costs, plus contribute at least in some part to their share of indirect costs. Loser customers don’t even cover their direct cost. The best entrepreneurs are quick to fire their loser customers so they go to their competitors. Laggard customers need to be examined to see if they can be converted to good customers.
Even if you can’t convert a laggard customer to a good customer you may want to keep them around if you have any extra capacity, as they at least pay a portion of your indirect costs. Finally, good customers should demand the bulk of your attention to make sure they remain your customers.
Do you have loser customers who deserve to be fired? Are they taking up your precious resources at the expense of your good customers? Do you have a plan to turn your laggard customers into good customers?
