Understanding the Multidimensional Aspects of Cost and Profitability

Cost and profitability analysis or modeling can provide deeper insights into the multidimensional aspects of cost and profitability. The multidimensional perspective involves looking at transactions from a granular level. Let’s consider an example to illustrate this.

Suppose I apply for a mortgage in New York through an online portal, and my mother, who lives in San Diego, applies for the same mortgage at a branch. We have the same product, but our transactions are different. My transaction was made online, while my mother’s was made in-person at a branch. These differences in transactions involve various dimensions such as channel, customer type, and product.

How can cost modeling help in uncovering the true profitability of these different transactions? The cost of a loan is generally based on three elements: expected losses, cost of funding, and operational expenses. The cost of funding is the same for both of us, as it’s the same product with a similar range of interest. However, expected losses and operational costs can vary significantly.

My mother’s expected losses, for instance, might be different from mine due to our different customer types and segments. Similarly, the operational costs associated with servicing my online transaction are different from those associated with my mother’s in-branch transaction.

By modeling these costs accurately, we can gain granular data that allows us to detail the cost side of things, thereby providing insights into profitability.

So, can cost and profitability modeling help in explaining the true profitability on a multidimensional level? The answer is yes. By understanding the true profitability in a multidimensional way, we can improve the bottom line of a business.