Profitability and value analysis

What is profitability and value analysis?

Many organisations don’t have a clear understanding of the factors driving their profitability, or the ways different factors interact.  This lack of clarity can make it difficult to make effective business decisions – if you don’t know where the value lies, how can you increase it?

Profitability and value analysis provides essential information for driving marketing strategy, whether it’s the acquisition of new customers, the selective attrition of existing ones, the retention of others or simply maximising the future value of all of them. 

The process starts with key questions for your team:

• Why do you want to do this analysis?
• How will you use the insights?
• What financial figures drive your business decisions now?
• What is your focus: sales, gross profit or net profit?
• Which profitability driver do you want to drill into (product, channel or customer)?

From there, most of the analytics work happens behind the scenes.  Datamine’s team cleans, organises, and analyses your business data, drawing out insights in your focus areas.  The result isn’t a single answer or figure – instead, it’s about understanding how different factors play into profitability and interact with each other.

Why should your business conduct a profitability analysis?

How can you enhance profitability if you don’t know how it works?  A profitability and value analysis deepens your understanding of the true value of your organisation – whether that lies in your product, your messaging or your audience.

Product profitability analysis

A product profitability analysis compares different products or product lines.  This method involves examining the revenue different products generate and contrasting it with the cost of selling them – including production, distribution, marketing and more.  The goal is to help you identify your most and least profitable products and lines, which can help you decide where to focus in the future.  For example, if one product has a high volume of sales but generates little or no profit, it could be time to discontinue it.

Customer profitability analysis

A customer profitability analysis helps you identify higher and lower-value customer groups.  The analysis works by looking at the revenue brought in by specific customer segments, compared with the cost of serving and communicating with those groups.  Building a better understanding of these customer segments can help you focus your marketing resources on high-value groups and target messages more precisely.

Channel profitability analysis

Channel analysis looks critically at your sales pathways to find out which channel is bringing in the bulk of your profits.  This type of analysis examines all your sales channels – including e-commerce, brick-and-mortar stores, social media and marketplace sales – to find out where sales are coming from.  We also look at the interaction between different parts of the sales journey and their role in sales.  For example, customers might visit your website to browse, and then visit your physical store to make the final purchase.  This can help you optimise resource allocation and change sales strategies to focus on higher-value channels.

Profitability analysis can help you build your understanding of profitability drivers, identify gaps and problem areas, and give you the tools to make better marketing and inventory decisions.

Improve understanding of product, service and channel value

Clear, tangible insights about the value of your products, services, customer groups and sales channels help you develop a deeper understanding of profitability drivers in your business.  This understanding helps you make business-building, profit-boosting decisions around product lines, channel choices and marketing.  

Identify areas for improvement

A profitability analysis can uncover problem areas and opportunities for improvement.  Certain products may be big sellers without generating a lot of profit, others can make up a small proportion of your sales but a larger chunk of your revenue.  Some customer groups may be profitable but underserved.  By pulling out insights, your business can pinpoint these gaps, make changes, and ultimately increase revenue.

Optimise marketing spend

Knowing what’s driving your profits means you can target the right people, use the right sales strategies, and promote the right products in your marketing.  This makes for precise targeting and less waste in your marketing budget.

Pinpoint value-building activities

Does effort correspond with value in your business?  In some organisations, activities can take a lot of time and energy without delivering much value.  For example, your sales team may spend a significant proportion of their time responding to customer queries, but these rarely lead to sales.  A profitability analysis can identify the activities that add value – and those that don’t – so you can focus on the work that brings in the most revenue.

Work towards determining the lifetime value of your customers

It’s just as important to understand future profitability as it is to know what’s happening in your business right now.  A profitability analysis can lead to a Customer Lifetime Value analysis, which gives you real insight into the long-term profit behind specific customers or customer segments.  Again, it’s all about deepening your understanding of profit drivers so you can make the right decisions as you move forward.

Profitability and value analysis can add value in any industry – from insurance to retail to manufacturing.

Here’s a look at some use cases from Datamine clients:

Insurance: Channel analytics and claim projections

Datamine’s insurance case studies include a major channel analytics project for a US company, which helped it understand the interaction between different advertising channels and their impact on sales.  Customer profitability analytics can also help insurers predict customers most likely to make a claim, which lets them focus on low-claim/high-value customers.  

Retail: Identifying high-value products and customers

Our retail use cases include a product and customer value analysis for Kiwi retailer Farmers.  This project helped the well-known department store predict which customers were most likely to make a high-value purchase, and when.  Using this predictive model, Farmers can target these customers with precise, timely messaging to ensure the potential sale doesn’t go to a competitor.

FMCG: Optimising margins in a fast-moving industry

In the FMCG (fast-moving consumer goods) sector, profitability and value analysis can help marketers maintain profitability across a large range of products.  In this sector, which can run on slim margins and fast-moving inventory, it’s crucial that businesses understand how product costs interact with value, so they can set every day and promotional prices without eroding profitability.

Other industries: Manufacturing, banking and finance, telecommunications, entertainment

Manufacturers benefit from ultra-precise product cost and revenue analysis, banking and finance providers can find high-risk and high-value customers, and telcos can identify customer segments most likely to bring in revenue.  There’s an application for almost every type of business – as Datamine’s work with businesses across New Zealand and Australia shows.

Want to know more about sector-specific benefits of profitability and value analysis? Browse our case studies here.