Can perceptual measures of customers profitability replace more objective ones?
Working paper, Working paper
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Business performance is closely related to decisions. When making decisions, managers need reliable information concerning the decision situation, e.g. the profitability of orders, the profitability of customers, credit risks, etc. Empirical studies have disclosed that insight in this area to a large degree can be characterized as insufficient. Nevertheless, businessmen are frequently making decisions about exchanges with customers. When making such decisions they have some sort of conception of the decision situation. The focus of this working paper is the relationships between perceptual and objective measures of profitability of customers. The context is the order-handling industry; that is four Norwegian exporters of fish products and their customers. The main research question that is addressed is: Can perceptual measures of customer profitability replace more objectives ones? Furthermore, managers’ conceptions of the solvency of customers are compared with rating codes (credit reports) furnished by professional credit agencies: What relationships are found between the managers’ assessment of the creditworthiness of the customers of their company and the rating codes that are furnished by international credit agencies? Managers may have different educational backgrounds, different experiences, etc: In what extent does education or experience have any influence on the perceptions of the managers concerning the profitability and the solvency of their customers? Usually, the managers work close together and are sharing the experiences that they have concerning markets, customers, etc. Thus, it is a reason to believe that they have a common understanding concerning product markets, customers, agents, etc.: In what extent has the managers formed common perceptions (paradigms) concerning the profitability and the creditworthiness of their customers? The findings of the study are rather convincing. Neither the objective measures of customer profitability (absolute and relative customer results) nor the rating codes furnished by the international credit rating agencies, should be replaced by the perceptual measures of the managers. It is a reason to believe that the customer-related problems are so complex that there is a need for profound insight when judging the financial measures under consideration. Neither education nor experience (rules of thumbs) can compensate for insufficient or missing customer accounts that are presenting reliable profitability figures. Besides, it seems as if the managers of all of the four exporting companies have common perceptions or paradigms concerning customer profitability and customer solvency. Such common perceptions may often be looked upon as an advantage. But, of course, then the perceptions should be correct. Here the findings are so convincing that it may be asserted or at least questioned whether the perceptions are right. Thus, the only way of amending the situation of the decision makers, is to include customer accounting as part of the managerial information system of a business. Further managerial implications are discussed at the end of the working paper, Finally, some central problems and problem areas and suggestions for further research are presented.
UtgiverSNF/Centre for Fisheries Economics