ABSTRACT
This chapter shows how customer profitability can be analysed using activity-based techniques and demonstrates how illuminating the analysis can be through discussion of the early Kanthal case and detailed analysis of the Sloan Styles case.
Customers can receive prices that bear little relationship to (total) quantity purchased and McKinsey consultants have developed techniques that demonstrate this. They developed the pocket price waterfall which highlights the various discounts and incremental costs that might reduce list price to “pocket price”. A variation of the technique tracks the “pocket margin” from list to actual margin generated. In addition, McKinsey consultants discuss many examples of the pocket price band, the variation in pocket price across customers. In the Monnarch battery case a wide range of pocket prices was revealed with little correlation between pocket price and size of customer. This is typical, with obvious opportunities for profit improvement and for the ongoing management of pocket price waterfalls.
