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
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