Lego Case

How LEGO globally manages its customer profitability at market segmental (customer) and product-portfolio levels and to what extent do those segments differ across their product portfolio of brand.

CAP:

CPA is the allocation of revenues and costs to customers so that the profitability of those customers can be calculated.

Approaches:

LEGO should takes series steps to manage its customer profitability. First, set segments based on the size of retailers since LEGO sold product directly to retailers; set product segments based on the themes of different sets since LEGO bricks have multiple sets. Then, calculates annual revenue and cost per segment as the "cost to serve" for each customer varies. Activity-based Cost method can be used based on customer batch-level cost because transactions between LEGO and retailers consist of various complicated costs such as order-processing, invoicing, and recording of sales returns and allowances. At last, profitability over the life time (the sum of accumulated cash flows) of each segment can be work out with WAAC method.

Strategies:

For profitable customer segment, LEGO can develop a long term customer relationships. For example, LEGO can constantly provide joint forecasting, inventory management and marketing support to large chain store. For least or non-profitable segments, reengineering and elimination can be used. For example, LEGO no longer ship cartons that are not full since 2004. However, review of strategies is needed because non-profitable segments may become profitable in future.

Importance and Benefits:

CPA is important for LEGO to gain competitive position. Commonly, for both LEGO sets (normal bricks or DUPLO) and customers (kids or adult), some are profitable while some are unprofitable. Since customer uses resources differently (kids require educational sets while adults require special edition sets), the "costs to serve" them are different. It means, for each customer, each $1 of revenue or gross margin does not necessarily contribute equally to the profits. Pareto's '80:20 rule' indicates that 20% of customers generate 80% of the profit. CPA studies, or the "Whale Curve" (see图), also shows that 20-25% of customers generate over 100%, sometimes even 200-300% of the profits, 50% are break even and 20-25% are loss making. Hence, by identifying the most valuable customer segments and product lines, LEGO can prioritize marketing, sales and service investments to avoid unnecessary efforts or costs spent on unprofitable LEGO sets and customers. Moreover, with CPA, profitable new LEGO sets can be found out, small retailers' orders can be gain with discounts, and related after-sale services can be provided. Additionally, CPA is more beneficial