Know your customer.

• Author: Riley, Michael J.
• Position: Customer analysis as a tool to cut costs and boost sales

The traditional way to improve corporate results is to increase sales and cut costs. But one CFO takes a different tack.

Not all sales help the bottom line. Some customers cost more than others. Some get large discounts. Service costs for others are high. So why don't more companies routinely analyze their customers to see if they're profitable? And if they're not, why don't more companies find ways either to weed out the albatrosses or make them profitable - and, in the bargain, identify the types of customers that find their products attractive?

Although it seems to be a common sense approach, many corporations don't show much interest in what 1 call customer analysis - a tool that can turn around an unsuccessful company or make a profitable enterprise even more so.

Here's what I've learned about customer analysis as a financial executive in industries ranging from airlines to utilities to publishing and broadcasting - and most recently at the U.S. Postal Service.

Instead of routinely pushing more sales, companies ought to question the profitability of specific purchasers - and not just today's customers, but those they anticipate serving five years down the road. Also, companies should consider adding value to a product for a higher price. You sometimes can achieve a premium price with a small add-on.

Companies should also study whether they are, in effect, giving away products at a loss to certain customers. Firms do that, despite the old quip that if a product loses money, you make it up in volume. You need to look at which customers find a product attractive. Do they perceive it to be a good value? If so, does the product they buy return a profit?

Flying Carpets

Airlines spring to mind as one example. They constantly discount fares. But they do so to vacationing families who buy tickets months in advance - and use the airline perhaps once a year. Or they'll discount to a family - trailing six children and 24 pieces of luggage - taking a once-in-a-lifetime vacation.

Airlines are like discount rug merchants. They sell fabulous seats at low profit or at a loss, without analyzing the future potential of that customer, or even the potential of that one fare. On the other hand, they'll charge a business traveler handsomely and give him or her a poor seat - although the person is a regular customer and carries on one bag at little cost to the airline.

Banking is another obvious example. U.S. commercial banks stressed convenient locations for...