Question

Discuss how allocation of customer-related overhead cost can lead to better decision making within firms with reference to the case below.

‘An insurance company, A-Insure Limited, decided to use CPA to identify profitable and non-profitable customers after it grew concerned about the poor financial performance of one of its policy options. A-Insure collected customer data through original policy proposal forms which were stored electronically in a customer database. It was able to conduct a complex cross correlation between known cost drivers and the demographic and other characteristics of policy holders. The cost drivers were:

• commission payments to financial advisers who sold the policy

• early surrender of the policy by the policy holder

• changing of bank details and consequent chasing of missed premiums

• responding to customer queries.

The analysis identified that the policy was unprofitable when sold to recently retired clients but was profitable when sold to other client segments. Recently retired customers had more time to review and consider changes to their insurance policies and to make queries. In response, the company reduced agents’ commissions on the policies according to the age of the policyholder to discourage them from selling to the non-profitable client segment.

Most companies have a customer database that can be mined for information to identify customer segments. If companies do not have the software to perform detailed CPA, specialist software can be purchased from many business software vendors.’

Discuss how allocation of customer-related overhead cost can lead to better decision making within firms with reference to the case below.

‘An insurance company, A-Insure Limited, decided to use CPA to identify profitable and non-profitable customers after it grew concerned about the poor financial performance of one of its policy options. A-Insure collected customer data through original policy proposal forms which were stored electronically in a customer database. It was able to conduct a complex cross correlation between known cost drivers and the demographic and other characteristics of policy holders. The cost drivers were:

• commission payments to financial advisers who sold the policy

• early surrender of the policy by the policy holder

• changing of bank details and consequent chasing of missed premiums

• responding to customer queries.

The analysis identified that the policy was unprofitable when sold to recently retired clients but was profitable when sold to other client segments. Recently retired customers had more time to review and consider changes to their insurance policies and to make queries. In response, the company reduced agents’ commissions on the policies according to the age of the policyholder to discourage them from selling to the non-profitable client segment.

Most companies have a customer database that can be mined for information to identify customer segments. If companies do not have the software to perform detailed CPA, specialist software can be purchased from many business software vendors.’

Answer 1

Customer based overhead cost are more specific in nature and they can lead to better decision making.

Customer based overhead cost will lead to identification of those customer in nature who are highly profitable to the overall business and hence the allocation is to be done on the basis of specific consumer so that there would be a better picture of the overall customer relative profitability.

In this case the insurance company has segregated different customer on the basis of different cost drivers whic were on the basis of early surrender of policy and commission payment to the financial advisors or changing the bank details and consequences of missed premium or responding to customer queries

these costs should be strategically designed and allocated to a specific section so that it could be exploited to the maximum extent and it would lead to the benefit generation for the overall company because there should be a best targeting of the potential customer as it is being shown in the example that retired people have more time to analyse various options while younger people do not have that much time, so the targeting of various customer needs to be done according to the their behaviour and cost allocation should be done accordingly in order to maximize the return.