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What’s driving profitability?

What’s driving profitability?

What’s driving profitability?

Businesses face growing margin pressure as they battle to adapt, contain costs and grow. The pace of internal change is also increasing driven by technology innovation, shifting consumer preferences and increased competition. 

To meet these challenges, organizations are placing trust in readily available information and long standing processes within their businesses. This information, however, often falls short of being able to support actionable change and managers instead turn back to their intuition or make assumptions based on incomplete information. This can often result in ineffective decisions and misdirected change.

Five examples of common assumptions made include:

  1. Customers with higher revenue or sales volumes are assumed to contribute more to the bottom-line and therefore attract more marketing investment, sales investment and greater rebates or discounts;
  2. Digital channels are assumed to be less expensive than traditional face-to-face or phone channels attracting project investment;
  3. Product portfolios are commonly expanded based on a desire to provide a greater range to customers, without understanding the impact on profitability;
  4. Process improvements are targeted based on management opinion rather than cost improvement potential;
  5. Pricing is set in response to the market without understanding product costs.

To make decisions with greater certainty requires a look beyond a traditional general ledger and towards a view that clearly shows how company resources are aligned towards future profit potential. Without this, businesses will continue to struggle to prioritize and set a clear direction.

Three profitability lenses

Three lenses are required to understand how value is created by customers’ demand for products and services across different channels.


Product profitability provides a fully costed view of profitability across a product lifecycle. These insights are typically used to rationalize product portfolios or to identify areas of cost improvement.


Customer profitability provides a view of profitability by customer or customer segment. This allows a business to identify and prioritize customers that contribute the most to profits.


Channel costing shows the cost of providing different services and activities over different channels. This is used to inform channel strategy and investment.


Development of these views requires the allocation of revenue and costs to customers, products and channels. Whilst revenue and direct costs are often straight forward to allocate, indirect costs are more difficult to allocate.  

Allocation of costs to activities provides a missing link between the activities a business performs and the subsequent impact on customer, product and channel profitability. The result is actionable and targeted insight, which can direct business improvement to specific activities and measure the financial impact of changes to these activities.

Your benefits

Significant and measurable improvements can be realized by investing in a profitability analysis. Typical benefits that can be unlocked by these insights are:

  1. Improved pricing, discounting and rewards.
  2. Customer prioritization and alignment.
  3. Product rationalization and decommissioning.
  4. Channel investment.
  5. Product performance improvement.

How KPMG can help

KPMG enables you to rapidly develop profitability insights, and provides you with a roadmap to sustaining a long-term solution. An initial proof-of-value will enable your business to generate and action insights quickly, before embarking on a longer term solution. It will allow your business to tailor the insights generated to ensure that they meet the needs of the business and demonstrate the usefulness of the insights.

The proof-of-value can be deployed within five to fifteen weeks, depending on the scope of the insights needed, the scale of the business and the quality of information available. The model can then be updated at regular intervals by your staff or by KPMG, as an ongoing service.

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