well-informed decisions. 1.
1 Research Questions In examining the factors influencingcustomer profitability in Malaysian hotel industry, this research is aimed tolook on the answer to these four (4) significant research questions: i) Isthere any relationship between customer relationship characteristics andcustomer profitability?ii) Isthere any relationship between customer demographics and customerprofitability?iii) Isthere any relationship between types of customer cost and customerprofitability? andiv) Isthere any relationship between customer costs allocation and customerprofitability? 2. SIGNIFICANT OF THE RESEARCH Profitability analysis is an instrumentwhich enables the users to gauge company’s performance. It is used to evaluateboth the return and risk of a company. It also allows companies in distinguishingbetween performances primarily attributed to operating decisions and those thatare tied to financing and investing decisions. Customer profitability analysisidea is to figure out the customer service activities and cost drivers to fixthe profitability of each customer or group of customers.
The customer servicehere means all activities to complete the sale and to satisfy the customers’demand. Using customer profitability analysiswould bring significant advantage towards the company. Companies would not onlyreceive information about their revenue but also able to measure their key customerprofitability. Thus, the customer profitability analysis is critical to the companiessince it would enable the companies to re-evaluate the customers and take astrategic decision over which customer segment should be kept and improved, oreven eliminated.
As profitability analysis can be applied to many areas ofindustry, hotel sector exists within a tight competitive market. In order to improve companies’ financialperformance, hotel industry segmented their customers by expanding multipleproduct features and services. Since hotel industry offers services, theexistence of this business depends on the number of the customers. The morecustomers, the higher the revenue and therefore, the main goal of a hotel is toattract more guess to use their service. The use of customer profitabilityanalysis in hotel industry will help in identifying which customer contributesa higher income and which brings loss to company.
Along with the effort in determiningthe most profitable customers, hotel industry is the best area to do a researchabout customer profitability analysis because hotel management has segmentedits customers based on the various services. It means each customer or group ofcustomer will contribute different amount of profit. In order to maximize itsprofit, cost to serve customers is also a main consideration of a company. Todetermine the cost of serving customers and set the basis for evaluating theprofitability, there are two approaches that can be applied; traditional methodand activity based costing method.
Under traditional method, management assumesthe cost used is equal that is why in term of hotel industry, the cost-to-serveto the customer is the same. Activity based costing treats costwith different way as the traditional does. Under this method the cost isassigned based on the service offered. Activity based costing simply providesuseful information for pricing its services and identifying activities wherethe costs can be reduced or value added.
The use of customer profitabilityanalysis in hotel industry appears as a powerful tool to allow management toconsider the cost and profit from a customer perspective. This information isapplicable in decision making process to support long and short-term customerrelated decision. It simply is a key to improve hotel operating performance. The companies provides value to itscustomers, but its customers also provide value to the companies. Customerperception is extremely important as if it is not positive, it will lead tonegative advertising, and therefore there is the need to gain customer loyalty.It is important to determine how to manage customer relationships in order toincrease customer satisfaction, therefore the companies should be knowledgeableas to how various customers consume the companies’ resources. 3. LITERATURE REVIEW 3.
1 Customer profitability Noone & Griffin (1999) statesthat long-term sustainability and success of companies depending on how the manageprofit yield from customer relationships. Therefore, companies need to knowtheir customers’ profitability are and by what are the factors that drive profitability.Niraj, Gupta, and Narasimhan (2001) states that assessing profitability at theindividual level is important to differentiate profitable customers from theless profitable. Quantifying customer profitability encourages companies to focuson long term rather than short term (Gupta and Lehmann, 2003) and to focus oncustomer rather than products. Companies should focus differently towardtheir customers by allocating more resources and providing more support totheir regular and most profitable customers while reducing resources spent oncustomers who are less profitable.
Companies should ensure that customersproviding large contributions to the operating income of a company receive alevel of attention which matches their contribution to the company’s profitability (Horngren et al.2005). Analysing customer-related expensesand comparing this with their revenues gives a company insight in customerprofitability.
Customers can be ranked by order of profitability based onPareto analysis, the well-known 80/20 rule; 80 percent of sales generated by 20percent of customers. Cooper & Kaplan (1991) states that this analysisdescribes that a very small proportion of items usually account for themajority of the value. Van Raaij et al. (2003) found that for a company producingand selling professional cleaning products, 20 percent of the customers responsiblefor 95 percent of profits. In Cooper & Kaplan (1991) a company was cited that20 percent of customers generating 225 percent of profits.
From this, it seemsthat companies face low number of profitable customers and a large number ofbarely profitable or even loss making customers. Customerprofitability can also be presented in a customer pyramid. The customer base issplit into four (4) tiers, based on revenue or profit. Comparisons can be madeamong top customers, large, medium-sized, and small customers (Van Raaij etal., 2003). Another possibility is to graphically represent the distribution ofprofitability using the Stobachoff curve.
Storbacka (1998) introduced the