Benefits of Customer Profitability Analysis Reports in Repeated Budget Allocation Decision Making
52 Pages Posted: 4 Aug 2001
Date Written: Undated
We study how decision makers learn to improve performance across repeated budget allocation decisions. The costing system they use should be able to provide information that is of incremental value over mere outcome feedback and informal knowledge about customer's cost. We report an experiment demonstrating that customer profitability analysis (CPA) facilitates learning of the most appropriate allocation of a marketing budget among customers.
Results show that in a difficult learning environment, participants receiving CPA information made closer-to-optimal budget allocation decisions, resulting in higher cumulative profits compared to participants receiving traditional accounting reports. In easier learning environments, CPA yielded a smaller additional benefit over a traditional costing system combined with outcome feedback. Additional analyses show that CPA is superior because it enables decision makers to make more efficient use of a (hill climbing) heuristic for approaching the optimal allocation.
Keywords: Customer profitability analysis; ABC; Hill climbing; Decision making; Sales budget allocation
JEL Classification: M40, M46
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