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The Use and Perceived Merit of Customer Accounting in New Zealand
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The Use and Perceived Merit of Customer Accounting in New Zealand
Beverley R. Lord, Yvonne P. Shanahan Department of Accountancy, Finance & Information Systems
University of Canterbury and
Benjamin M. Nolan PriceWaterhouseCoopers
Christchurch, New Zealand Abstract As Lindsay (1994, 1995) encourages validation of existing results, this research replicates Guilding and McManus (2002) in a New Zealand (NZ) context. The usage and perceived merit of customer accounting practices were lower in NZ than in the Australian study. Few of the regressions where customer accounting usage and perceived merit were dependent variables revealed a statistically significant role for competition intensity and market orientation. There was some minor support for the perceived merit of customer accounting being higher in companies experiencing medium levels of competition intensity.
1. Introduction In 1997, Foster and Young found that the number one priority of managers was customer profitability/satisfaction. Over the last decade, there have been a number of papers addressing customer issues in both the marketing and management accounting literatures. The marketing literature focuses on customer lifetime value (see, for example, Mulhern, 1999; Libai, Narayandas and Humby, 2002), customer loyalty (Reinartz and Kumar, 2002) and customer relationship management (Ryals,
Key words: customer accounting, contingency analysis,
New Zealand Acknowledgment: The authors appreciate the helpful suggestions on this paper from the discussant, Shane Dikolli, and participants in the Accounting and Finance Association of Australia and New Zealand conference in Melbourne, July 2005, and from the editor and the anonymous reviewer.
2002), whereas the management accounting literature concentrates on customer profitability analysis (CPA) (see, for example, Foster, Gupta and Sjoblom, 1996; Smith and Dikolli, 1995).
One of the recent works combining customer accounting themes developed in the marketing and management accounting literatures is provided by Guilding and McManus (2002). Their survey of 300 Australian companies found that there was some usage of customer accounting (CA) practices, yet the perceived merit of these practices was greater than their usage. They found associations between CA and both market orientation and the level of competition intensity, albeit a weak relationship for the latter.
A key observation made by Guilding and McManus (2002) concerned the dearth of research in the customer accounting area. Lindsay (1994, 1995) argues for the confirmation of previous results, hence the motivation for replicating the Guilding and McManus (2002) study in a New Zealand context.
The remainder of the paper is organised as follows. The next two sections present the marketing and the management accounting literature on customer accounting practices. As this is a replication of the work of Guilding and McManus (2002), their work is summarised, including the objectives of the research, the research questions and the research method. This study’s findings are then presented and discussed, followed by a conclusion.
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2. Marketing and the customer Within the marketing literature, there has been a shift of emphasis from revenues to profits, including attracting and retaining profitable customers (Foster and Gupta, 1994). Mulhern (1999) claimed that customer profitability can be a basis for deciding on the allocation of marketing resources, and these resources are best allocated to the most profitable customers or segments. Ryals (2003) argued that the role of marketing is to identify profitable customers and to apply retention strategies that reduce the risk of defection.
Customer lifetime value, also known as lifetime customer profitability analysis (Mulhern, 1999; Libai et al., 2002; Ryals, 2002; Gupta and Lehmann, 2003; van Raaij, Vernooij and van Triest, 2003), is a prospective analysis of all the costs and revenues a customer will generate over a lifetime, and is a form of discounted cash flow analysis (Andon, Baxter and Bradley, 2003a). Successful companies recognise the fact that, in many trading situations, not all customers are equal, so knowledge of a customer’s lifetime value is essential (Wayland and Cole, 1994).
In many situations, a small percentage of customers contribute a large proportion of profits, and a large number of customers are unprofitable (Shapiro, Rangan, Moriarty and Ross, 1987; Niraj, Gupta and Narasimhan, 2001; Ryals, 2003). Mulhern (1999) recommended that, when acquiring a new customer, a company should not pay more than the assessed lifetime value to acquire them. Libai et al. (2002) documented a retailer who used the segment-based approach to enable marketing actions to be tailored to the right customers from the customer base.
Gupta and Lehmann (2003) suggested that the lifetime value of a customer is its annual margin multiplied by a factor, usually in the range of 1 to 5. The solution that they proposed is much simpler than the application of the other customer lifetime models, as it involves less subjective assessment of future revenues and costs.
Although “the issue of customer profitability has attracted interest in both the management accounting and marketing literature” (Niraj et al., 2001), the literature reveals limited cross- disciplinary examination of CPA systems
(Foster and Gupta, 1994; Foster et al., 1996; Guilding, Kennedy and McManus, 2001; Niraj et al., 2001).
3. Accounting and the customer Customer profitability analysis (CPA), also sometimes called customer account profitability (Connolly and Ashworth, 1994) or customer profitability (Niraj et al., 2001), is the most widely used customer accounting technique (Smith, 1993; Smith and Dikolli, 1995; Foster et al., 1996; Noone and Griffin, 1997; Mulhern, 1999; Guilding et al., 2001; Guilding and McManus, 2002; van Raaij et al., 2003). CPA can identify the most profitable customers, allowing marketing efforts to be directed towards them (Mulhern, 1999; Guilding et al., 2001; Libai et al., 2002; Ryals, 2003).
Van Raaij et al. (2003, p. 580) found that insights into customer profitability “had an immediate impact on strategies, programs and actions”, enabling better decisions to be made. Connolly and Ashworth (1994) claimed that all forward-looking companies recognise the need to focus on customer account profitability. They gave the example of Crookes Healthcare who felt that the prime objective of customer account profitability was to manage their customer portfolio — their most significant intangible asset.
Although CPA may reveal that a customer is unprofitable, that does not necessarily mean that the customer should not be retained (Smith and Dikolli, 1995; van Raaij et al., 2003). The effect of terminating a relationship needs to be considered, and it may be that managing an existing relationship is of more benefit to the company in the long-term (Libai et al., 2002; van Raaij et al., 2003).
Smith and Dikolli (1995) suggested that CPA using activity-based costing (ABC) is an effective way to collect detailed information on customers. Many of the problems with customer accounting techniques arise because “most management accounting systems focus not on the customer but on products, departments, or geographic regions” (Foster et al., 1996, p. 5). CPA needs information where the customer is the unit of analysis. ABC can generate information on the customer, which gives managers better insight into how customers generate revenues and consume costs (Cooper
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and Kaplan, 1991), leading to better long-term decision-making (Noone and Griffin, 1997; van Raaij et al., 2003).
Some companies have identified customers as important intangible assets (Connolly and Ashworth, 1994; Wayland and Cole, 1994; Niraj et al., 2001), and that assessing their value, using net present value, customer lifetime value and CPA information, will offer a guideline for the overall value of a firm (Andon, Baxter and Bradley, 2003a, 2003b). However, it appears this practice is uncommon and management information systems will need to become more customer-focused in order to apply this technique.
4. Summary of Guilding and McManus (2002) Guilding and McManus (2002) classified customer accounting practices as: customer profitability analysis (CPA), customer segment profitability analysis, lifetime customer profitability analysis, the valuation of customers or customer groups as assets, and customer accounting (a holistic notion)1. Their study assessed the use and perceived merit of these various practices using a 7-point Likert scale, ranging from ‘1’ (not at all/negligible intensity) to ‘7’ (to a large extent/extremely intense). They also sought to test contingent factors that might affect the use and perceived merit of customer accounting in an Australian context, using a survey of the top 300 listed Australian companies.
Guilding and McManus (2002) found that the use of customer accounting, customer segment profitability analysis, and CPA were above the midpoint of their measure, while the other practices appraised were well below this point. They also found that managers perceived the merit of the customer accounting practices to be greater than the extent of their use. The perceived merit of all the customer accounting practices were above the midpoint of the same scale.
Slater and Narver (1994, p. 22) found market orientation increased customer value, because “a market-driven business develops a
1 See Appendix A for the glossary of customer accounting
practices which was provided to participants in both Guilding and McManus (2002) and this study.
comprehensive understanding of its customers’ business and how customers in the immediate and downstream markets perceive value”. Therefore the measurement of customer value becomes important. Guilding and McManus (2002) found some support for the use and perceived merit of customer accounting practices in companies with a high market orientation. However, no support was found for the hypothesis that the use and perceived merit of customer accounting practices is higher in companies experiencing medium levels of competitive intensity.
5. The Replication Guilding and McManus (2002) stress that there is scope for further research on the largely untapped area of customer accounting. Lindsay (1994, 1995) claims that, in the natural sciences, replications are an important way of establishing the validity and significance of prior research. Although this has not been the norm in accounting research, Lindsay (1995, p. 35) argues “that replication (to establish whether the result holds under different conditions, leading to generalization) must become the critical criterion of adequacy”.
This research surveyed companies listed on the New Zealand stock exchange (NZX). As it is a replication, the objectives and hypotheses are identical to those of Guilding and McManus (2002). The objective was “to appraise the incidence of customer accounting, to assess practitioners’ perceptions of customer accounting’s merit as a managerial tool, and to…test hypotheses concerned with contingent factors that might affect the use and perceived merit of customer accounting” (Guilding and McManus, p. 45). The hypotheses were: H1a: “customer accounting usage rates will be
higher in companies experiencing medium levels of competition intensity” (p. 49).
H1b: the “perceived managerial benefit of customer accounting is greater in companies experiencing medium levels of competition intensity” (p. 49).
H2a: “customer accounting usage rates are higher in companies with a high market orientation” (p. 50).
H2b: the “perceived managerial benefit of customer accounting is greater in companies with a high market orientation” (p. 50).
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6. Research method The replication used data collected from a questionnaire2 containing the four questions reported in Guilding and McManus (2002). The questionnaire was mailed to the chief financial officer (CFO) and the marketing manager of all organisations listed on the NZ stock exchange (NZSX)3 with New Zealand addresses, a total of 143 organisations, with a follow-up mailing two weeks after the initial mail-out.
There were 52 responses from the first mailing and 32 from the second, 84 responses altogether (a 29.4% response rate). However 14 of these (from 11 different companies) were not usable, because of wrong addresses, unwillingness to participate in the survey, or inapplicability of the survey to that company. Therefore, there were 70 usable responses (24.5% of the sample), 47 from CFOs and 23 from Marketing Managers.
When both the CFO and marketing manager from the same company submitted responses, Guilding and McManus (2002) did not include the response of the marketing manager. This was because the marketing manager was the least frequent respondent, and therefore greater homogeneity would be promoted. The same approach was taken in this study.4 This has resulted in the following analysis being based on 58 responses.
The same two tests for non-response bias used by Guilding and McManus (2002) were undertaken. The first involved telephoning ten non-respondents. Reasons for their non- participation were: they did not receive the questionnaire because their secretaries probably thought it was spam, they were too busy, or it was company policy not to complete questionnaires. The second test involved calculating a Mann-Whitney U statistic to investigate whether there were any differences in responses from the first and last 25% of respondents. No statistically significant differences were found.
2 See Appendix B for the questionnaire. 3 http://www.nzx.com 4 There were 12 companies for which both the CFO and
the Marketing Manager responded. The correlation of the two responses was statistically significant (at a p value of 0.1 or less) for 8 of the 12 companies. The CFO’s response was used in each of these 12 cases.
7. Results Table 1 presents descriptive statistics for the usage rates of the five customer accounting practices. Guilding and McManus (2002) found ‘customer accounting’ was the most used of the five practices, followed by ‘customer segment profitability analysis’ and ‘customer profitability analysis’. These first three practices were all above the midpoint range. Guilding and McManus (2002) found that the use of the other two practices was below the midpoint range. All means in this research were below the midpoint, ranging from ‘customer profitability analysis’ at 3.98 to ‘lifetime customer profitability analysis’ at 2.37. This cross country difference may be due to the smaller size of New Zealand listed companies compared to the Australian study which limited the sample to the largest 300 as measured by market capitalisation. Prior research has found that larger companies are more likely to apply more developed management accounting systems (see, for example, Bruns and Waterhouse, 1975, Merchant, 1981).
The means of the first three practices are ranked in a different order than in Guilding and McManus (2002). The bottom two are in the same order for both usage and perceived merit in this study. All the customer accounting practices had higher means in the findings of Guilding and McManus (2002), except for the valuation of customers or customer groups as assets.
The practice with the major difference in means is ‘customer accounting’. Customer accounting had a mean of 4.22 in the results of Guilding and McManus (2002), whereas it had a mean of only 3.08 in this research. Customer accounting had the highest usage in the findings of Guilding and McManus (2002), but it only ranked third in this research. This is possibly because the New Zealand companies did not take the holistic approach to ‘customer accounting’ given in the definition. If any customer accounting practice was used, ‘customer accounting’ should have been given the same score as the highest used practice. This would then see the practice ‘customer accounting’ being the highest used practice, as in the results of Guilding and McManus (2002). This applies equally to the perceived merit of ‘customer accounting’.
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To discover if the results of this research were significantly different from the results of Guilding and McManus (2002), t-tests were carried out on the mean usage of the five practices. The usage of lifetime customer profitability analysis, valuation of customers or customer groups as assets, and customer accounting were all significantly higher in Australian companies (t-stat 6.61, 5.42 and 3.69 respectively, p<0.001 for all).
Descriptive statistics for the perceived managerial merit of the five customer accounting practices are presented in Table 2. The perceived merit of all the practices were above the midpoint range in the findings of Guilding and McManus (2002). The perceived
merit in the findings of Guilding and McManus (2002) ranged from ‘customer segment profitability analysis’ at 5.28 to the ‘valuation of customers or customer groups as assets’ at 4.19. The bottom two practices are well below the means of the top three practices. In this study, the practices were perceived as being beneficial in the same order as they were used. Customer profitability analysis (4.86) was the practice perceived to have the most merit followed by customer segment profitability analysis (4.35) and customer accounting (3.82). The first two practices are above the midpoint, while customer accounting, the valuation of customers or customer groups as assets and lifetime customer profitability analysis are below it.
Table 1 Descriptive Statistics for Customer Accounting Usage Rates
Mean Std. Deviation Theoretical
Range Actual range Incidence of
“n/a” G&M G&M Min Max Min Max G&M Customer profitability analysis 3.98 4.03 2.04 2.10 1 7 1 7 4% 19% Customer segment profitability analysis 3.70 4.12 2.11 2.14 1 7 1 7 2% 17%
Customer accounting 3.08 4.22 1.73 2.14 1 7 1 6 8% 15% Valuation of customers or customer groups as assets 2.58 2.58 1.73 1.89 1 7 1 7 2% 22%
Lifetime customer profitability analysis 2.37 2.64 1.50 1.96 1 7 1 7 4% 23%
Table 2 Descriptive Statistics for the Perceived Managerial Merit of
Customer Accounting
Mean Std. Deviation Possible Range Actual range
Incidence of “n/a”
G&M G&M Min Max Min Max G&M Customer profitability analysis 4.86 5.08 2.11 2.04 1 7 1 7 2% 15% Customer segment profit ability analysis 4.35 5.28 2.13 1.87 1 7 1 7 0% 15%
Customer accounting 3.82 5.21 1.95 1.93 1 7 1 7 2% 12% Valuation of customers or customer groups as assets 3.57 4.19 1.95 2.07 1 7 1 7 0% 17%
Lifetime customer profitability analysis 3.56 4.38 1.93 2.08 1 7 1 7 2% 19%
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The five customer accounting practices are all perceived as having more benefit in an Australian context (Guilding and McManus, 2002) compared to the New Zealand context (this research). The mean scores in the work of Guilding and McManus (2002) were all higher than the results of this research. These differences were significant for four of the practices: customer accounting (t-stat 4.37, p<0.001), customer segment profitability analysis (t-stat 2.83, p<0.01), lifetime customer profitability analysis (t-stat 2.55, p<0.02) and valuation of customers or customer groups as assets (t-stat 1.93, p<0.1).
Principal component factor analysis of the five competition intensity items was undertaken, and one factor with an eigenvalue greater than one (3.172) was revealed. This factor explained 63.4% of the variance and had factor loadings of 0.60, 0.53, 0.74, 0.68 and
0.63 respectively. A further principal component factor analysis was conducted on the four market orientation items. One factor (eigenvalue 2.61) explained 65.1% of the variance, with factor loadings of 0.57, 0.71, 0.60 and 0.74 respectively. These factors were used in the correlation and regression analysis that follow.
A matrix of the Pearson correlations for the usage of the five customer accounting practices and also competition intensity, market orientation and the square of competition intensity is presented in Table 3. Guilding and McManus (2002) did not include the square of competition intensity in their correlations, but did in their regression analysis. In this study the square of competition intensity is only significantly correlated with customer profitability analysis (p<0.05).
Table 3 Pearson Correlations Between the Use of the Five Customer Accounting
Practices and the Three Independent Variablesa
Customer accounting
Customer profitability
analysis
Customer segment
profitability analysis
Lifetime customer
profitability analysis
Valuation of customers or
customer groups as
assets Marketing orientation
G&M G&M G&M G&M G&M G&M
Customer profitability analysis 0.50
*** 0.70**
Customer segment profitability analysis 0.40
** 0.60** 0.65*** 0.71**
Lifetime customer profitability analysis 0.30
* 0.54** 0.61*** 0.57** 0.72*** 0.60**
Valuation of customers or customer groups as assets
0.42** 0.40** 0.35** 0.45** 0.41** 0.54** 0.58*** 0.77**
Marketing orientation 0.17 0.32** 0.23 0.27** 0.08 0.30** 0.11 0.31** 0.13 0.34**
Competition intensity -0.06 0.34** 0.20 0.36** 0.24 0.49** 0.28* 0.23* 0.23 0.23* 0.38** 0.44**
(Competition intensity)2 -0.05 -0.30
* -0.12 -0.20 -0.23 -0.26
a There are now three independent variables with the addition of the square of competition intensity to competition intensity and market orientation.
*** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).
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Guilding and McManus (2002) found statistically significant relationships for the inter-correlations between all five customer accounting practices (p < 0.01). A similar result was found in this study, with all relationships significant at p < 0.05 or less. The strongest relationships are between customer segment profitability analysis and lifetime customer profitability analysis (r = 0.72); customer profitability analysis and customer segment profitability analysis (r = 0.65), lifetime customer profitability analysis (r = 0. 61), and customer accounting (r = 0.50); and lifetime customer profitability analysis and valuation of customers or customer groups as assets (r = 0.58).
Guilding and McManus (2002) also found statistically significant relationships between the use of the five practices and competition intensity and market orientation (p < 0.01 and p < 0.05). However, in this research, there was
only one statistically significant relationship: between lifetime customer profitability analysis and competition intensity. No relationships existed between market orientation and the use of any of the five customer accounting practices. However there was a relationship between market orientation and competition intensity (r = 0.38, p < 0.01).
Table 4 presents a matrix of the Pearson correlations between the perceived merit of the five customer accounting practices and competition intensity, market orientation and competition intensity squared. Guilding and McManus (2002) found statistically significant and positive relationships between the perceived merit of all the customer accounting practices and market orientation and competition intensity (p < 0.001). Their highest inter- correlation was between customer profitability analysis and customer segment profitability analysis (r = 0.78).
Table 4 Pearson Correlations Between the Perceived Merit of the Five Customer
Accounting Practices and the Three Independent Variablesb
Customer accounting
Customer profitability
analysis
Customer segment
profitability analysis
Lifetime customer
profitability analysis
Valuation of customers or
customer groups as
assets
Marketing orientation
G&M G&M G&M G&M G&M G&M
Customer profitability analysis 0.71
*** 0.71***
Customer segment profitability analysis 0.69
*** 0.70*** 0.76*** 0.78***
Lifetime customer profitability analysis 0.61
*** 0.66*** 0.69*** 0.77*** 0.64*** 0.76***
Valuation of customers or customer groups as assets
0.59*** 0.63*** 0.52*** 0.66*** 0.63*** 0.69*** 0.80*** 0.77***
Marketing orientation 0.17 0.47*** 0.31* 0.34*** 0.18 0.31*** 0.24 0.37*** 0.03 0.34***
Competition intensity 0.09 0.46*** 0.18 0.44*** 0.22 0.55*** 0.28* 0.40*** 0.31* 0.38*** 0.38** 0.44***
(Competition intensity)2 -0.16 -0.37
** -0.25 -0.30* -0.34* -0.26
b There are now three independent variables with the addition of the square of competition intensity to competition intensity and market orientation.
*** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).
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The inter-correlations between the perceived merit of the five customer accounting practices are all statistically significant in this study (at p < 0.001). The highest inter-correlation is between lifetime customer profitability analysis and the valuation of customers or customer groups as assets (r = 0.80). This research identified more statistically significant relationships for the perceived merit than for the usage.
Guilding and McManus (2002) believe there is a linear relationship between the two independent variables (competition intensity and market orientation) and the perceived merit of the five practices because there is a significantly positive relationship between them. This research found only two significant correlations between competition intensity and the five customer accounting practices: lifetime customer profitability analysis (r = 0.28, p < 0.05) and valuation of customers or customer groups as assets (r = 0.31, p < 0.05). There was also a statistically significant relationship between customer profitability analysis and market orientation (r = 0.31, p < 0.05). The square of competition intensity was found to be significantly negatively correlated only with the valuation of customer or customer groups as assets (p < 0.05).
Table 5 presents the results of the regression analysis where the usage of the five customer accounting practices are the dependent variables. The independent variables are competition intensity, market orientation, and the square of competition intensity. Guilding and McManus (2002) found a statistically significant relationship for all regression equations, and adjusted R2’s ranging from 8% to 23%. In the replication, none of the five regressions was statistically significant. The adjusted R2’s ranged from 0% to 23%.
As shown in Table 5, no support was found for hypothesis 1a in either Guilding and McManus (2002) or the replication; that is, customer accounting usage rates were not higher in companies experiencing medium levels of competition intensity.
Guilding and McManus (2002) found some support for hypothesis 2a because the coefficient for market orientation was statistically significant and positive for three of the five customer accounting practices. This research found no support for customer accounting usage rates being higher in companies with a high market orientation.
Table 5 Customer Accounting Usage Rates Regression Analysisc
Customer accounting Customer
profitability analysis
Customer segment
profitability analysis
Lifetime customer
profitability analysis
Valuation of customers or
customer groups as assets
G&M G&M G&M G&M G&M
Constant 3.16*** 2.54*** 4.24*** 2.68*** 3.78*** 3.12*** 2.49*** 2.02*** 2.76*** 2.44***
Competition intensity -0.33 0.06 -0.01 0.15 0.52 0.33
*** 0.36 0.11 0.22 0.19
(Competition intensity)2 -0.09 -0.16 -0.30 -0.14 0.02 -0.11 -0.06 0.03 -0.15 0.11
Market orientation 0.35 0.17** 0.32 0.11 0.01 0.08 0.01 0.26*** 0.09 0.32***
Adjusted R2 -0.01 0.16 0.06 0.14 0.00 0.23 0.03 0.08 0.01 0.10
F 0.81 6.68*** 2.11 5.95*** 1.02 10.43*** 1.43 3.61*** 1.25 4.52***
p 0.50 0.00 0.11 0.00 0.39 0.00 0.25 0.01 0.30 0.00
c A standardised regression coefficient is provided for each independent variable. * p<0.1 ** p<0.05 *** p<0.01
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The results for the regression analysis where the perceived merit of the five customer accounting practices are the dependent variables are presented in Table 6. In the replication, only customer profitability analysis had statistically significant coefficients: with market orientation (p < 0.05) and with competition intensity squared (p < 0.05). The adjusted R2’s ranged from 0% to 32%. In contrast, all five regression equations had at least one significant relationship in the findings of Guilding and McManus (2002), with adjusted R2’s ranging from 17% to 32%.
Guilding and McManus (2002) found no support for the perceived managerial benefit of customer accounting being greater in companies experiencing medium levels of competition. However some support was found for hypothesis 1b in this research, with the coefficient for the square of competition intensity exhibiting a statistically significant relationship with the perceived merit of customer profitability analysis (p < 0.05).
Guilding and McManus (2002) found support for hypothesis 2b, that perceived managerial benefit of customer accounting is greater in companies with a high market orientation, for: customer accounting (p < 0.01),
lifetime customer profitability analysis (p < 0.01), and the valuation of customers or customer groups as assets (p < 0.01). Some support was also provided for hypothesis 2b in the results of this research, with market orientation exhibiting a statistically significant relationship with: customer profitability analysis (p < 0.05).
8. Discussion Lindsay (1994, p. 40) states that “reporting negative results is important in establishing the conditions under which a result (initially established under close replications) does not hold”. The first finding of this replication showed that the usage of all of the customer accounting practices was below the midpoint (4 on the 7-point Likert scale), in contrast to Guilding and McManus (2003) in which three practices had means above the midpoint. The perceived merit of the top two practices were above the midpoint. This contrasts with Guilding and McManus (2002) who found that the perceived merit of all of the five practices were well above the midpoint. They also found that the valuation of customers or customer groups as assets was the least used practice and the practice that held the least perceived merit.
Table 6 Customer Accounting Perceived Merit Regression Analysisd
Customer accounting
Customer profitability
analysis
Customer segment
profitability analysis
Lifetime customer
profitability analysis
Valuation of customers or
customer groups as assets
G&M G&M G&M G&M G&M
Constant 4.08*** 3.85*** 5.35*** 3.07*** 4.71*** 3.54*** 3.89*** 2.28*** 3.93*** 2.47***
Competition intensity -0.11 0.14 -0.29 0.22
*** 0.14 0.33*** 0.19 0.23*** 0.38 0.20
(Competition intensity)2 -0.14 -0.16 0.42
** -0.10 -0.19 -0.17 -0.21 0.03 -0.27 -0.02
Market orientation 0.38 0.29*** 0.68** 0.14 0.39 0.04 0.39 0.22*** -0.10 0.19***
Adjusted R2 0.00 0.30 0.19 0.23 0.05 0.32 0.09 0.21 0.09 0.17
F 1.00 14.07*** 4.93*** 10.12*** 1.92 15.77*** 2.72* 9.01*** 2.64* 7.42***
p 0.40 0.00 0.01 0.00 0.14 0.00 0.06 0.00 0.06 0.00 d A standardised regression coefficient is provided for each independent variable. * p<0.1 ** p<0.05 *** p<0.01
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Comparing tables 1 and 2 shows that each practice was perceived to have greater managerial benefit than its current use. This highlights that there is scope for greater use of the individual customer accounting practices, and customer accounting in general. This finding was consistent in both studies. However, there were statistically significant differences, between Guilding and McManus (2002) and the replication study, with respect to the mean usage of lifetime customer profitability analysis, valuation of customers or customer groups as assets and customer accounting, and the perceived benefit of all except customer profitability analysis.
Whereas Guilding and McManus (2002) found statistically significant relationships for all usage and perceived merit regression equations formulated, this research found that the regression equations for the perceived merit of only three of the practices were significant. No significant regressions were found for the use of the five customer accounting practices. This strongly suggested that other factors are needed to explain the variation in use and perceived merit of the customer accounting practices. Also, support was not found for all of the hypotheses in this research, nor in the research of Guilding and McManus (2002). Therefore, new hypotheses need to be developed and tested.
Guilding and McManus (2002) concluded that, while there was no support for their hypotheses concerning competition intensity, it was still worthy of future research. This research again found no support for the use of customer accounting in companies experiencing medium levels of competition intensity. Contrary to the findings of Guilding and McManus (2002), there was some minor support found for the perceived merit of customer accounting being higher in companies experiencing medium levels of competition intensity.
Lindsay (1995) states that replication can be used to confirm earlier results, therefore allowing generalisation. With two studies finding little support for medium levels of competition intensity (competition squared), perhaps this variable could be omitted from future research. However, as there is some evidence that competition intensity itself might be related to the use and perceived merit of
customer accounting, this should continue to be examined in future research. Other factors that might be worth investigating include competitive strategy and environmental uncertainty (Guilding and McManus, 2002), as well as company size and industry.
As there is stronger support for the hypotheses concerning market orientation, and Slater and Narver (1994) found that being market oriented increases customer value, this variable should be included in future research.
The replication has also revealed an opportunity to improve the method. Guilding and McManus (2002) included a holistic definition termed “customer accounting”. Respondents could have been using the other practices, but only recorded “customer accounting”, or vice versa. In this case, there is a higher usage (statistically significant at 10% level) of two practices (CPA and customer segment profitability analysis) than the holistic notion of “customer accounting”. Future research might drop the holistic category.
9. Conclusion It has been acknowledged that customer accounting is a largely untapped research area (Guilding and McManus, 2002). This research has been a useful first step in research into customer accounting in New Zealand. There is opportunity for future research to continue with market orientation and explore other factors such as competitive strategy to try to explain the use and perceived merit of customer accounting. Whether a company has a differentiation strategy, is a cost leader or operates in a niche market is likely to affect the use and perceived merit of customer accounting. Industry and company size are other factors that should also be considered.
As Lindsay (1994) points out, in the same way that Otley’s (1978) study produced findings that conflicted with Hopwood (1972) and sparked a flurry of research, reporting the contradictory findings between this study and Guilding and McManus (2002) should be an incentive for other researchers to continue work in this very important, yet still largely untapped, management accounting area.
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Appendix A Glossary of Customer Accounting Terms
Customer accounting “includes all accounting practices directed towards appraising profit, sales, or present value of earnings relating to a customer or group of customers” (Guilding and McManus, 2002, p. 48). Customer profitability analysis (CPA) “involves calculating profit earned from a specific customer. The profit calculation is based on costs and sales that can be traced to a particular customer. This technique is sometimes referred to as customer account profitability” (Guilding and McManus, 2002, p. 46). Customer segment profitability analysis “is the practice of performing a customer profitability analysis (as defined above), on a segment or customer group basis” (Guilding and McManus, 2002, p. 47). Lifetime CPA “involves extending the time horizon for customer profitability analysis to include future years. The practice focuses on all anticipated future revenue streams and costs involved in servicing a particular customer” (Guilding and McManus, 2002, p. 47). The valuation of customers or customer groups as assets “refers to the calculation of the value of customers for the company” (Guilding and McManus, 2002, p. 48).
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Appendix B Customer Accounting Questionnaire
Please circle, on the scale from 1 to 7, the number that is most applicable to your organisation. Indicate N/A if it is not applicable to your organisation.
1. To what extent does your company use the following practices? not at all to a large extent
a. Customer profitability analysis (CPA) 1 2 3 4 5 6 7 N/A
b. Customer segment profitability analysis 1 2 3 4 5 6 7 N/A
c. Lifetime customer profitability analysis 1 2 3 4 5 6 7 N/A
d. Valuation of customers or customer groups as assets 1 2 3 4 5 6 7 N/A
e. Customer accounting 1 2 3 4 5 6 7 N/A
2. To what extent do you consider the following practices would be a useful aid to management in your company?
not at all to a large extent a. Customer profitability analysis
(CPA) 1 2 3 4 5 6 7 N/A
b. Customer segment profitability analysis 1 2 3 4 5 6 7 N/A
c. Lifetime customer profitability analysis 1 2 3 4 5 6 7 N/A
d. Valuation of customers or customer groups as assets 1 2 3 4 5 6 7 N/A
e. Customer accounting 1 2 3 4 5 6 7 N/A
3. For your organisation, what is the level of competition intensity for the following items? negligible intensity medium intensity extremely intense
a. Selling and distribution 1 2 3 4 5 6 7 N/A b. Quality and variety of products 1 2 3 4 5 6 7 N/A c. Price 1 2 3 4 5 6 7 N/A d. Market share 1 2 3 4 5 6 7 N/A e. Customer service 1 2 3 4 5 6 7 N/A
4. To what extent do you agree with the following statements? negligible intensity medium intensity extremely intense
a. My company has a strong understanding of our customers 1 2 3 4 5 6 7 N/A
b. The functions in my company work closely together to create superior value for our customers
1 2 3 4 5 6 7 N/A
c. Management in my organisation thinks in terms of serving the needs and wants of well-defined markets chosen for their long- term growth and profit potential for the company
1 2 3 4 5 6 7 N/A
d. My company has a strong market orientation 1 2 3 4 5 6 7 N/A
