Interface of Accounting with Marketing in terms

of Customer Profitability Analysis – A Systematic

Review

Submitted To: Dr. Kulwinder Singh

Submitted By: Shuchi Sablok
[Research Scholar (HRM)]
 MARKETING AS A DISCIPLINE
• The leading marketing text, Kotler and Keller (2006, p. 6), quotes the
American Marketing Association’s definition of marketing; an
organization function or set of processes for creating,
communicating, and delivering value to customers and for managing
customer relationships in ways that benefit the organization and its
stakeholders.
• We are more drawn to Ambler and Roberts’ (2006a) more ambitious
definition of marketing as “what the whole firm does to source and
harvest cash flow” since this moves emphasis to what marketing
does, as opposed to who does it, finessing the need for turf fights.
That is, marketing’s job is to generate income streams. It uses
resources (inputs) to create current and future outputs. It incurs
expenses to develop revenue.
 ACCOUNTING AS A DISCIPLINE
• Accounting may also be defined is a variety of
ways. The Miriam Webster on line dictionary
(2007) defines it as “the system of recording and
summarizing business and financial transactions
and analyzing, verifying, and reporting the
results”. This definition applies to accounting
irrespective of whether it pertains to internal
reporting (management accounting) or reporting
to external stakeholders (financial accounting).
 MARKETING – ACCOUNTING INTERFACE
• Both the marketing and accounting functions are often ‘under attack’
within companies; marketing tends to lack a voice in the board room
and is not seen to be accountable, whereas accounting is losing its
influence as an indicator of shareholder value, for instance, owing to
the problems of valuing intangible assets (Sidhu & Roberts, 2008).

“The necessity for management accountants to begin to rethink certain

aspects of their own pursuit of financial management was
complemented by a growing willingness among the marketing
management colleagues to be more open about their own practices,
thereby providing the conditions for a spirit of greater cooperation
and collaboration to emerge.”
 TYPES OF INTERFACE
• An informing interface means that marketing
and accounting professionals or disciplines
mainly transfer information without becoming
involved in one another’s domains.
• An integrating interface implies that
professionals or disciplines in both domains
need to coordinate and collaborate in solving
a particular problem.
 ISSUES ON WHICH MANAGEMENT ACCOUNTING AND
MARKETING SHOW INTERFACE
• Budgeting
• The two interfaces between marketing and management accounting (i.e. the
role of the sales budget in the budgetary process and the analysis of revenue
variances) merely point to an informing relationship. Sales data inform the
start of the budgeting process, while information about market size and
market-mix variances is transferred by the management accounting
professionals to the marketing professionals in the company, enabling the
latter to revise the sales policy.
• Performance Measurement
• Management accounting has been criticized for its focus on the short-term
financial performance of firms by using indicators such as annual profit and
return on investment. In response to this type of criticism, so-called
multidimensional performance measurement systems have been developed.
One of the most well - known systems is the balanced scorecard (BSC),
introduced by Kaplan and Norton. Through its customer perspective the BSC,
as a management accounting tool, attaches some importance to marketing
aspects.
ISSUES ON WHICH MANAGEMENT ACCOUNTING AND
MARKETING SHOW INTERFACE
• Cost Management
• In order to gain a better insight into cost behavior ABC can be used in
combination with the two cost management methods, i.e. target costing and
lifecycle costing. Foster and Gupta [14] have made a plea for increasing the
understanding of the variability of marketing costs as related to, for example,
individual customers, customer groups and the company as a whole. Whenever it
is necessary to develop marketing-specific cost drivers or use value-chain cost
drivers, such as competitiveness in distribution or price-product attributes, the
application of ABC requires an integrating interface between accounting and
marketing professionals.
• Capital Investment
• Management accounting could be of great value for marketing in finding ways to
compute the monetary value of brands, on a regular day-to-day basis, thus
opening possibilities for conducting disaggregated statistical analyses of
marketing investments
 EXAMPLE OF CONFLICT BETWEEN BOTH
FUNCTIONS
Scenario Issue Combined solution
A new spa treatment is The accounting team are The marketing department
priced by the accounting taking no account of the establish that there is competition
department using a cost- market, what the customer locally offering the same treatment
plus approach and is prepared to pay or the (customers can go elsewhere) and
calculates the 1 hour completion. the prices range from £52 - £62.
treatment should be sold Given this market data the product
at £65. price can be set considering the
market:

 Set at the lower end of the

market, £55 to attract
customers in to try the new
product;

 Given the quality and

reputation of the spa, priced at
£65 to identify it as a premium
product in the market; or
 Set at the psychological price
of £59, being under the £60
boundary.
CUSTOMER PROFITABILITY ANALYSIS
• Customer profitability analysis, which has recently become increasingly important,
examines how individual customers or groups of customers differ in their
profitability [5].4 There are several reasons why examining customer profitability
differs from investigating product profitability.
• First, customers may buy a bundle of partly complementary products provided by a
certain supplier, for example a deposit, a mortgage or insurance services from a
bank, or purchase a new car from a car dealer, including its maintenance.
• Second, marketing costs, such as costs concerning sales contacts, order taking,
invoicing and transport differ from production costs in terms of their cost drivers .
• Third, cost calculations mostly concern the yearly costs of particular objects, such as
products or organizational units, whereas the costs throughout the lifecycle of a
product are more important from a customer perspective.
• Product complementarity, specific marketing costs and the product lifecycle all point
to elements of marketing reasoning that have been adopted within a management
accounting technique. CPA uses the ABC approach to costing to track costs by
activities associated with customers, not individual products and services.
 How can CPA aid managers’ decision
making?
• Explicitly identifying which customer groups (segments) generate
the most profit can aid the targeting of resources and marketing
efforts to these groups;
• Providing information that can aid cost reduction, by highlighting
costs by activities gives managers’ the chance to review the need of
activities or how their costs can be reduced;
• Assisting pricing of products, particularly packages and discounting
for certain customer groups;
• Allowing markets to be segmented on profitability, not just
revenues;
• Aiding a differentiation strategy;
• Providing information for making more informed decisions.
 INTRODUCTION
• In the digital economy where companies can utilize big data,
including affluent customer data, the importance of customer assets
is more emphasized, because personalization supported by customer
data and information technology allows firms to build customer
relationships, which results in increased revenues from retained and
expanded customers than from newly acquired customers (Rust and
Ming-Hui 2014; Rust and Tuck Siong 2006). To manage a marketing
strategy using customer data, both management accounting and
marketing scholars are increasingly interested in accounting
techniques using customer data, which are collectively called
customer accounting (CA) (Guilding et  al. 2001). Thus, by reviewing
the literature on CA, the present study explores its roles in the
interface between management accounting and marketing.
 AIM OF THE STUDY
• This study has three purposes.
1. The first purpose is to clarify the weaknesses of traditional accounting that
provide insights into the interface between management accounting and
marketing.
2. The second purpose of the present study is to review literature on the existing
CA techniques to seek their applicability. CA has been studied from the
viewpoints of management accounting and marketing. From the management
accounting perspective, revenue accounting (RA) and customer profitability
analysis (CPA) are addressed. From the marketing perspective, various methods
with regard to customer lifetime value (CLV) and customer equity (CE) have been
developed.
3. The present study finally explores how RA as well as CPA and CLV and CE can
contribute to the three accounting limitations by linking CA tools to the relevant
marketing concepts: customer journey, customer acquisition and retention, and
customer assets.
 INTERFACE
BETWEEN MANAGEMENT
ACCOUNTING AND MARKETING
 Accounting weaknesses
• Unrecognition of multiple revenue milepost: Traditional accounting categorizes
production processes into stages and measures the production costs of each
stage. Glover and Ijiri (2002) suggest that there are also other stages or revenue
mileposts before and after the sales stage of a product. For example, a customer
may become aware of a product through the company’s advertisement and
promotional campaigns and gathers information from multiple sources before he/
she finally decides to buy it.
• Lack of information on revenue sustainability:Traditional accounting, however,
lacks information regarding the sustainability of revenues, although recurring
“fixed revenues” from repeaters are more valuable than non-recurring “variable
revenues” from newly acquired customers.
• Bias against intangibles capitalization: Although traditional accounting
recognizes tangible assets on the balance sheet, it does not capitalize a great part
of important intangible assets such as its customer base, something in which
venture businesses, especially in their start-up phase, make a massive investment.
RELEVANT MARKETING CONCEPTS
• Customer journey: As customers interact with a company using sophisticated digital
technologies on multiple touchpoints through different channels and media, these
models have evolved into the concept of the customer journey. The customer journey
is the process that a customer experiences across all stages and touch points (Lemon
and Verhoef 2016).
• Customer acquisition and retention: Based on the notion of revenue sustainability, RA
categorizes revenue into variable and fixed revenues. While variable revenue involves
customer acquisition as it changes in proportion to marketing activities such as
advertisement, fixed revenue entails customer retention as it comes from retained
customers.
• Customer assets: Capitalization of intangibles is directly related to the notion of
customer assets. As the background of customer assets, it is worth noting that
investment in customers should not be expensed in a single period because customers
acquired through investments bring in cash flows over multiple periods and therefore
contribute to a firm’s value if the present value of cash flows is larger than the initial
investment (e.g., Bonacchi et al. 2015).
STRUCTURE OF LITERATURE
REVIEW
The three accounting weaknesses corresponding to the three
marketing concepts provide the basis for the consideration of
the interface between management accounting and marketing.
Relating CA tools to the three marketing concepts can reveal
how they contribute to the three accounting weaknesses.
 Methodology
• A systematic literature review was conducted to study the interface of
accounting and marketing with reference to customer profitability analysis. The
checklist Preferred Reporting Items for Systematic Reviews and Meta- Analyses
(PRISMA; Liberati et al. 2009) was adapted to suit the requirements of the study.
• A system was developed to conduct the search on Google Scholar as the
research forum is motivated by its ability to produce relatively greater number of
main themed and related articles. Moreover, Google scholar is the most popular
database to search for literature and is vastly utilized by scholars to conduct
similar researches (Pahlevan Sharif et al., 2019)
• The last search was conducted on 28th August 2021. An Advanced Search was
conducted by inserting the keywords- “Interface of Accounting and Marketing”,
“Customer profitability analysis”, “Customer Accounting” located anywhere in
the article. The current study reviewed 15 research articles. The study selection
process has been summarized in Fig 1:
Records retrieved through database
searching

(n= 520) FIGURE 1.

Pertinent records (n =34)

(n= 520)

Duplicate records eliminated after

title screening (n =2)

Records retained after title

screening (n =26)

Irrelevant records eliminated after

abstract screening (n =6)

Records retained after abstract

screening (n =20)

Records eliminated after full text

screening (n =5)

Final records (n = 15)

 REVENUE ACCOUNTING
• RA was proposed alongside the development of digital
technologies such as the Internet, which enhanced the
availability of a huge amount of customer data. Glover and Ijiri
(2002) argue that customer data enable the accounting of
revenue for planning and control of marketing, in contrast with
production-oriented cost accounting. RA aims at solving the
three weaknesses of traditional accounting built upon cost
accounting: the lack of information on revenue mileposts,
revenue sustainability, and intangible customer assets. In
response to each accounting weakness, RA is composed of three
sub-tools: Markov chain analysis, revenue-volume-profit (RVP)
analysis, and project accounting with sinking-fund depreciation.
 CUSTOMER PROFITABILITY ANALYSIS
• CPA is seen as an important tool in the portfolio of strategic management
accounting because it has occurred in the process of management accounting
becoming marketing oriented (McManus and Guilding 2008; Roslender and
Wilson 2008). A recent study goes further to relate SMA to marketing, identifying
it as “a generic approach to accounting for strategic positioning, defined by an
attempt to integrate insights from management accounting and marketing
management within a strategic management framework” (Roslender and Hart
2003, p. 255). Bellis-Jones (1989) in one of the early studies on CPA, points out
that for distributors whose customers are retail stores, selling, general, and
administrative expenses should be allocated to each customer, because gross
margin does not always rightly measure customer profitability.
• CPA has two variations (Guilding and McManus 2002): customer segment
profitability analysis and customer lifetime profitability analysis. In the former,
customer segment-level cost is assigned to each segment as direct cost. Customer
lifetime profitability extends CPA to accommodate multiple periods.
 CUSTOMER LIFETIME VALUE
AND CUSTOMER EQUITY
• Customer lifetime value (CLV) is defined as the discounted future
income stream derived from acquisition, retention, and
expansion projections and their associated costs (Gupta et al.
2004). In other words, CLV is the net present value of an
individual customer as a project. CLV has emerged in the context
of marketing theory underlining the maximization of profitability
of long-term customer relationships versus one-time transaction.
• CE largely bases its estimation on CLV, because it is the total CLV
of current and future customers. Multiplying CLV and the number
of current customers is insufficient to arrive at CE. Predicting the
number of acquired customers in the future is also required.
Therefore, CE is more involved in customer acquisition than CLV.
 DISCUSSION
• Link to Customer Journey
CPA should expand its scope of cost analysis to cover the entire customer journey. The central focus of CPA
is traditionally on the improvement in efficiency of customer output unit-level costs, customer lot-level costs,
and customer retention costs for extant customers rather than the acquisition costs for new customers.
• Link to customer acquisition and retention
RVP analysis in RA can be used to balance customer acquisition (variable revenues) and retention (fixed
revenues). This analysis focuses on short-term balance in an accounting period. As some companies need to
make huge investments when acquiring new customers, controlling short-term losses from variable revenues
within current profits from fixed revenues is critically important to make ends meet. The calculation of the
breakeven point of customer acquisition requires that the marketing costs be separated into two parts:
retention costs for fixed revenues and acquisition costs for variable revenues. If the allocation of acquisition
and retention costs were distorted, RVP analysis would produce a misleading breakeven point.
• Link to customer assets
Project accounting is worth considering in the management accounting context. To apply project
accounting, costs of customer acquisition must be assigned to individual customers. In this regard, CPA
supports project accounting by assigning customer acquisition costs across pre-sales stages in the customer
journey to individual customers. In addition, CPA can be used to estimate future customer-level costs such as
customer output unit-level costs, customer lot-level costs, and customer retention costs (Niraj et al. 2001).
This information is an important input for CLV estimation.
 CONCLUSION
• This study explores the interface between
management accounting and marketing by
relating accounting weaknesses to the relevant
marketing concepts. This is followed by the review
of each CA technique. As RA, CPA, and CLV and CE
focus on revenue, cost, and future cash flows,
respectively, different CA tools have different links
with the marketing concepts. Accordingly, CA
tools can complement accounting weaknesses.