Managing profitability requires not only a customer-centric focus but also a thorough understanding and effective management of customer profitability. Customer profitability management (CPM) is a strategy-linked approach to identifying the relative profitability of different customers or customer segments in order to devise strategies that add value to most-profitable customers, make less-profitable customers more profitable, stop or reduce the erosion of profit by unprofitable customers, or otherwise focus on long-term customer profitability.

    Managers are often surprised to find out that a small percentage of customers generate substantially more than 100% of profits, and the remaining customers are either breakeven or unprofitable. Using a customer profitability management system replaces intuitive impressions of customer profitability with fact-based information and supporting analysis.

    The backbone of a CPM system is a costing system that is focused on tracing and causally assigning costs to each customer or customer segment without arbitrary broadly averaged cost allocations. Assigning revenues to customers or customer segments can present a few issues, but the major challenge in implementing a CPM system is the selection and implementation of an accurate and informative costing system. A costing system should not only accurately assign product costs and gross margin to customers or customer segments, but it should also assign the costs to serve.