Customer size and customer profitability in non‐contractual relationships

Abstract

Purpose

The profitability of individual customers can show substantial variation, both in money amounts and in margins (percentages). The literature suggests that larger customers have a higher customer profitability margin: a dollar in revenue from a large customer generates more profit than a dollar in revenue from a small customer. The purpose of this paper is to explore the relationship between customer size and the customer profitability margin.

Design/methodology/approach

Draws up a model with five variables (customer size, product margin, exchange efficiency, support, customer profitability margin) and hypothesizes the relationships between the variables. Uses LISREL to test the relationships on a database from a business‐to‐business setting.

Findings

The relationship between customer size and customer profitability margin is not direct, but runs through other variables, mainly exchange efficiency. It is not the result of larger customers paying higher product margins or having fewer customer support demands.

Research limitations/implications

Adds to the empirical literature on customer profitability. Ideally, this would be done using panel data rather than the cross‐sectional data used in this paper.

Practical implications

Profitability data at the level of individual customers provide useful insights. Customer size as such is not a driver of the customer profitability margin. Identify the trade‐offs between customer size, product margins (discounts), support demands, and exchange costs that ultimately lead to customer profitability.

Originality/value

Adds to the empirical literature on customer profitability and offers practical implications for managing customer relationships.

Citation

van Triest, S. (2005), "Customer size and customer profitability in non‐contractual relationships", Journal of Business & Industrial Marketing, Vol. 20 No. 3, pp. 148-155. https://doi.org/10.1108/08858620510592768