How To Define The Profitability Components?

In this article, your attention is being specifically drawn to the actual components of profitability measures. You know that Profit is Total Revenue minus Total Costs. Unfortunately, the exact definition for Revenue, and Costs will vary not only by industry, but also by individual business. So, you may wish to adapt the generic definitions for your enterprise.

Total Revenue is made up of:

• Fixed Revenue is produced by charges independent of the customer activity (e.g. flat monthly subscription fee);
• Variable Revenue, also known as activity-based revenue, is produced by charges that depend on the customer activity (e.g. itemised call charges that depend on the call duration);
• Other Revenue is a catch-all for other actual income generated by the business.

Total Costs is made up of:

• Direct Costs include the company expenses that are directly related to the products/services provided to the customer, and therefore can be defined at the product/service event level. Examples include the costs of completing a phone call, etc. These events-related costs can be easily summarised over a predefined time interval (e.g. month) to calculate total direct costs of providing a given product/service to the customer account;
• Indirect (allocated) costs include the company expenses that are not directly related to the products/services provided to the customers, and commonly occurred at the level much higher that an individual product/service event. These costs can be used in the profitability analysis if the company can more or less correctly allocate them to the required level of granularity (e.g., to an individual account level). Indirect Costs may include maintenance, administrative, marketing and other costs (see below).

Maintenance Costs represent a portion of the total maintenance costs incurred by the company during a given month that has been allocated to a customer account in association with a particular product/service.

Administrative Costs represent a portion of the total administrative costs incurred by the company during a given month that has been allocated to a customer account in association with a particular product/service.

Marketing Costs include promotional, acquisition and retention costs. Depending on the granularity level, marketing costs can be defined as direct costs (e.g., acquisition and retention costs) or indirect costs. Thus, acquisition and retention costs can be directly associated with the customer account. In contrast to this, promotional costs are commonly associated with many accounts and/or products/services; however, a portion of the total promotional costs incurred by the company during a given month can be allocated to the customer account in association with a given product/service.

Other Costs represent a portion of other operational costs incurred by the company during a given month that has been allocated to a customer account in association with a particular product/service.

“There are some men who in a FIFTY-FIFTY proposition, insist on getting the hyphen too.”
Lawrence J. Peter