This essay aims to emphasize the synergy between the functions of finance and marketing created by the concept of Customer Profitability Analysis (CPA) and its potential benefits within lodging operations. Traditional accounting means as USALI are incompatible with the assessment of product and customer profitability performance, and hence do not assist the formulation of marketing strategies. CPA closes this gap between finance and marketing as it allows the distribution of revenue and costs on a segment or individual customer basis. Whereas the revenue per customer or segment may be sourced from property management systems and other means, costs are calculated in the context of CPA by the method of Activity-Based Costing (ABC), whose implementation is a complex and cost-intensive step. The first key benefit of implementing CPA and ABC is two-folded as the combined methods enable the assessment of an individual customer’s profit structure as well as information on the vulnerability of a property’s cash flow. The second key benefit is the facilitating role of CPA in determining a customer lifetime value, which therefore enables customer-centric pricing. The essay concludes with four recommendations for hotel managers.
Table of Contents
Tables of Figures
Abstract
Introduction
Establishing the Synergy between Finance & Marketing
Customer Profitability Analysis
Activity-Based Costing
The Payback of CPA & ABC Implementation
Conclusion
Bibliography
Table of Figures
Figure 1: Customer loyalty segmentation
Figure 2: Comparison between traditional costing and ABC
Figure 3: Two-dimensional ABC model
Figure 4: Customer profitability example
Abstract
This essay aims to emphasize the synergy between the functions of finance and marketing created by the concept of Customer Profitability Analysis (CPA) and its potential benefits within lodging operations. Traditional accounting means as USALI are incompatible with the assessment of product and customer profitability performance, and hence do not assist the formulation of marketing strategies. CPA closes this gap between finance and marketing as it allows the distribution of revenue and costs on a segment or individual customer basis. Whereas the revenue per customer or segment may be sourced from property management systems and other means, costs are calculated in the context of CPA by the method of Activity-Based Costing (ABC), whose implementation is a complex and cost- intensive step. The first key benefit of implementing CPA and ABC is two-folded as the combined methods enable the assessment of an individual customer’s profit structure as well as information on the vulnerability of a property’s cash flow. The second key benefit is the facilitating role of CPA in determining a customer lifetime value, which therefore enables customer-centric pricing. The essay concludes with four recommendations for hotel managers:
(1) CPA does not replace USALI but is a complementary accounting method.
(2) The necessity of implementing ABC depends on the property’s market complexity but it does provide other benefits outside the regular CPA framework.
(3) CPA only provides numeric data on customer profitability and therefore additional factors have to be considered in marketing decisions.
(4) The value of CPA in long-term strategy has to be considered.
Keywords
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Introduction
“[...] [Y]ield management is the process of allocating the right type of capacity to the right kind of customer at the right price as to maximize revenue or yield.” (Kimes, 1989: 15)
Even though this early statement by Kimes (1989) greatly simplifies the concept of yield/revenue management in the lodging industry, it raises two fundamental issues: Who is the right customer and what should he/she pay for the room? Since Reinartz and Kumar (2002) argue that the link between customer loyalty and profitability is relatively weak, these issues become even more prominent as guests that hotel managers perceive as loyal and hence devote time as well as money to may not be worth the investment or the discount given (Noone et al., 2003). This is supported by Noone and Griffin (1999), who argue that the level of service and support differs from customer to customer and so does therefore their profitability. However, Reinartz and Kumar (2002) further state that the weak connection between loyalty and profitability is due to the crudeness of the methods used in order to assess the loyalty of a customer. In their place, the authors suggest a framework segmenting the customer base into four different categories separated by the two interrelating variables of forecasted length of relationship and profitability (Figure 1). Whereas the former may be determined by statistical calculations or market research (Reinartz and Kumar, 2002; Noone et al., 2003), the latter does demand especially in lodging operations more effort interconnecting the expertise and resources of the finance function with the customer-centric activities in the area of marketing.
This paper will focus the critical analysis of the linking practice commonly referred to as Customer Profitability Analysis (CPA) on its key implications for the marketing function in hotel operations. Hence, before the concept of CPA along with the supporting model of Activity-Based Costing (ABC) will be reviewed, its advantage over conventional accounting means in the context of marketing will be emphasized. The examination of the potential benefits of the conclusive information established by CPA and ABC procedures will precede the conclusion of this paper where four key recommendations directly related to the hotel industry will be discussed additionally.
Figure 1: Customer loyalty segmentation
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Source: Adapted from: Reinartz, W. and Kumar, V. (2002), ‘The mismanagement of customer loyalty’. Harvard Business Review. Vol. 80, No. 7, pp. 86-94.
Establishing the Synergy between Finance & Marketing The ‘Uniformed System of Accounts for the Lodging Industry’ (USALI) developed originally in 1926 has greatly contributed to the comparability of financial data across this industry as this standardized accounting system is applied by most internationally operating hotel groups (Chin et al., 1995; Harris and Brown, 1998). USALI homogenizes amongst others the composition of the income statement by presenting three sections covering revenue centres, cost centres and definite expenses (e.g. management fees and income taxes) respectively to determine the net operating income (Pavlatos and Paggios, 2009). Still, its actual main objective is the implementation of the generally accepted accounting principles resulting in a limitation of available financial information (Karadag and Kim, 2006). Whereas Huefner and Largay III (2008) argue that financial reports are able to guide managers to improved decision-making, Selnes (1992) describes the figures provided by conventional accounting means as incompatible with the assessment of product and customer profitability performance, and with the formulation of marketing strategies. Karadag and Kim (2006: 156) support the latter notion by claiming that “[...] the current accounting systems fall short of enlightening marketing managers about how to devise marketing policies that will maximize profitability of selected customer groups.” Kaplan and Narayanan (2001) attribute this issue to the fact that financial reports do not require the assignment of operating expenses to customers. Therefore, another methodology has to be applied as Downie (1997: 311) argues:
Frequently asked questions
What is the main topic of this document?
This document focuses on the synergy between finance and marketing, particularly how Customer Profitability Analysis (CPA) and Activity-Based Costing (ABC) can improve lodging operations. It discusses the limitations of traditional accounting methods like USALI and how CPA can bridge the gap between finance and marketing by enabling the distribution of revenue and costs on a customer basis.
What is Customer Profitability Analysis (CPA)?
CPA is a method of analyzing the profitability of individual customers or customer segments. It involves distributing revenue and costs on a segment or individual customer basis, which helps in understanding the profit structure of each customer.
What is Activity-Based Costing (ABC)?
Activity-Based Costing (ABC) is a method used within CPA to calculate the costs associated with serving different customers. Implementing ABC is described as complex and cost-intensive, but it helps in understanding the true costs associated with various activities and customers.
Why are USALI (Uniformed System of Accounts for the Lodging Industry) insufficient for marketing decisions?
USALI is a standardized accounting system that focuses on financial reporting and adherence to generally accepted accounting principles. While it's good for comparability and overall financial management, it doesn't provide sufficient detail for assessing product and customer profitability, which is crucial for formulating effective marketing strategies.
What are the key benefits of implementing CPA and ABC in hotel operations?
The document outlines two primary benefits:
- Enables assessment of an individual customer’s profit structure and provides insights into the vulnerability of a property’s cash flow.
- Facilitates the determination of a customer lifetime value, which enables customer-centric pricing strategies.
What are the recommendations for hotel managers regarding CPA?
The essay concludes with four recommendations:
- CPA should be used as a complementary method to USALI, not a replacement.
- The need for implementing ABC depends on the property’s market complexity, but it offers benefits beyond the regular CPA framework.
- CPA provides only numerical data on customer profitability, so additional factors must be considered in marketing decisions.
- The value of CPA in long-term strategy should be considered.
What customer segmentation model is referenced in the text?
The text references a customer segmentation model from Reinartz and Kumar (2002), which divides customers into four categories based on forecasted length of relationship and profitability.
What is the relevance of yield management in this context?
The document uses Kimes' (1989) definition of yield management as a starting point to emphasize the importance of identifying the "right customer" and determining the "right price." This highlights the need for methods like CPA to understand customer profitability and make informed pricing decisions.
- Quote paper
- Shanin Schuessler (Author), 2010, Establishing the Synergy between Finance & Marketing in Lodging Operations , Munich, GRIN Verlag, https://www.grin.com/document/172304
