well-informed the return and risk of a company. It

well-informed decisions.

 

1.1               
Research Questions

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In examining the factors influencing
customer profitability in Malaysian hotel industry, this research is aimed to
look on the answer to these four (4) significant research questions:

 

i)                    
Is
there any relationship between customer relationship characteristics and
customer profitability?

ii)                  
Is
there any relationship between customer demographics and customer
profitability?

iii)                 
Is
there any relationship between types of customer cost and customer
profitability? and

iv)                 
Is
there any relationship between customer costs allocation and customer
profitability?

 

 

 

 

2.                  
SIGNIFICANT OF THE RESEARCH

 

 

Profitability analysis is an instrument
which enables the users to gauge company’s performance. It is used to evaluate
both the return and risk of a company. It also allows companies in distinguishing
between performances primarily attributed to operating decisions and those that
are tied to financing and investing decisions. Customer profitability analysis
idea is to figure out the customer service activities and cost drivers to fix
the profitability of each customer or group of customers. The customer service
here means all activities to complete the sale and to satisfy the customers’
demand.

 

Using customer profitability analysis
would bring significant advantage towards the company. Companies would not only
receive information about their revenue but also able to measure their key customer
profitability. Thus, the customer profitability analysis is critical to the companies
since it would enable the companies to re-evaluate the customers and take a
strategic decision over which customer segment should be kept and improved, or
even eliminated. As profitability analysis can be applied to many areas of
industry, hotel sector exists within a tight competitive market.

 

In order to improve companies’ financial
performance, hotel industry segmented their customers by expanding multiple
product features and services. Since hotel industry offers services, the
existence of this business depends on the number of the customers. The more
customers, the higher the revenue and therefore, the main goal of a hotel is to
attract more guess to use their service. The use of customer profitability
analysis in hotel industry will help in identifying which customer contributes
a higher income and which brings loss to company.

 

Along with the effort in determining
the most profitable customers, hotel industry is the best area to do a research
about customer profitability analysis because hotel management has segmented
its customers based on the various services. It means each customer or group of
customer will contribute different amount of profit. In order to maximize its
profit, cost to serve customers is also a main consideration of a company. To
determine the cost of serving customers and set the basis for evaluating the
profitability, there are two approaches that can be applied; traditional method
and activity based costing method. Under traditional method, management assumes
the cost used is equal that is why in term of hotel industry, the cost-to-serve
to the customer is the same.

 

Activity based costing treats cost
with different way as the traditional does. Under this method the cost is
assigned based on the service offered. Activity based costing simply provides
useful information for pricing its services and identifying activities where
the costs can be reduced or value added. The use of customer profitability
analysis in hotel industry appears as a powerful tool to allow management to
consider the cost and profit from a customer perspective. This information is
applicable in decision making process to support long and short-term customer
related decision. It simply is a key to improve hotel operating performance.

 

The companies provides value to its
customers, but its customers also provide value to the companies. Customer
perception is extremely important as if it is not positive, it will lead to
negative advertising, and therefore there is the need to gain customer loyalty.
It is important to determine how to manage customer relationships in order to
increase customer satisfaction, therefore the companies should be knowledgeable
as to how various customers consume the companies’ resources.

 

 

3.                  
LITERATURE REVIEW

 

 

3.1               
Customer profitability

 

Noone & Griffin (1999) states
that long-term sustainability and success of companies depending on how the manage
profit yield from customer relationships. Therefore, companies need to know
their customers’ profitability are and by what are the factors that drive profitability.
Niraj, Gupta, and Narasimhan (2001) states that assessing profitability at the
individual level is important to differentiate profitable customers from the
less profitable. Quantifying customer profitability encourages companies to focus
on long term rather than short term (Gupta and Lehmann, 2003) and to focus on
customer rather than products.

 

Companies should focus differently toward
their customers by allocating more resources and providing more support to
their regular and most profitable customers while reducing resources spent on
customers who are less profitable. Companies should ensure that customers
providing large contributions to the operating income of a company receive a
level of attention which matches their contribution to the company’s profitability (Horngren et al.
2005).

 

Analysing customer-related expenses
and comparing this with their revenues gives a company insight in customer
profitability. Customers can be ranked by order of profitability based on
Pareto analysis, the well-known 80/20 rule; 80 percent of sales generated by 20
percent of customers. Cooper & Kaplan (1991) states that this analysis
describes that a very small proportion of items usually account for the
majority of the value. Van Raaij et al. (2003) found that for a company producing
and selling professional cleaning products, 20 percent of the customers responsible
for 95 percent of profits. In Cooper & Kaplan (1991) a company was cited that
20 percent of customers generating 225 percent of profits. From this, it seems
that companies face low number of profitable customers and a large number of
barely profitable or even loss making customers.

 

Customer
profitability can also be presented in a customer pyramid. The customer base is
split into four (4) tiers, based on revenue or profit. Comparisons can be made
among top customers, large, medium-sized, and small customers (Van Raaij et
al., 2003). Another possibility is to graphically represent the distribution of
profitability using the Stobachoff curve. Storbacka (1998) introduced the