The marketing cube: DIMENSION 2 PROFIT POTENTIAL

There are a number of ways of estimating profit potential, some more complex than others, but the most straightforward method has provided value time and time again. Many marketers believe the most optimal solution to a problem is the complex one. However, complexity frequently turns into defeat.

Profit potential is an estimate of an individual’s contribution to the firm and can be arrived at by comparing potential to actual profit. There are three steps in computing profit potential:

—         Record the actual profit of each customer by devising and implementing a profit algorithm. Remember profit is a definition, not an estimate.

—         Construct a model to predict profit.

Based on actual recorded profit and externally available data predictors, such as demographics, socio- demographics and summarised credit data by geography, develop a predictive model. Recorded profit is the dependent variable, since the prediction of future profit potential is sought. The external data are the predictors, the independent variables. Internally housed data cannot be used, since these behaviours are used to define profit. The goal is to find those whose recorded profit is ‘low’, but whose predicted ‘score’ is ‘high’. — Subtract the recorded (actual) profit from the actual project. This is referred to as ‘profit opportunity’.

Figure 1 displays ten customers with their actual and predicted profit. The difference between these two lines is the profit potential or opportunity.

figure 1 profit opportynitu

Figure 1 Profit opportunity

This exercise answers the following question. Who currently is not profitable, but ‘looks like’ they should be? Make no mistake. These predictions will not be precise, but marketers should be concerned about a reasonable ranking of profit potential by customer. It is this position relative to all other customers in which they should be most interested. For example, if someone’s potential is predicted to be $225 and this ranks in the upper tier of potential profit dollars, this location in the upper tier may be all that is critical to marketers. And in fact, that may be all they can reasonably expect to achieve.

 

Representative APR 391%

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