Do you understand the true cost of serving each one of your customers? To determine a customer’s actual value to your business, you need to know the cost of serving that customer. Not all customers are equally profitable and taking an “average” approach to your supply chain costs is misleading.
What is cost-to-serve?
Cost-to-serve is an accounting method used to calculate the total cost of providing goods and services to a customer. It enables an organisation to gain cost visibility on which to base strategic decisions. Cost-to-serve includes costs such as manufacture or assembly, storage, handling, packaging, delivery, and customer service. The handling of each product and the sales channel used create differing cost drivers within the supply chain. Cost-to-serve analyses measure the profitability of servicing a customer, i.e. the value of that customer to the business.
The benefits of cost-to-serve analysis.
Knowing your cost to serve customers allows you to identify and improve inefficiencies in the supply chain, compare customer costs, and track customer costs over time. This approach helps retain profitable customers and provides insights for future innovation, identifying inefficiencies, waste, and informing strategic decisions to improve customer service and pricing optimisation.
The power of data
Data is crucial for tracking customer costs, identifying inefficiencies, and comparing customer costs. Manual handling of data is not feasible, so technology is necessary for efficient data analysis. Inaccurate data can lead to inefficient pricing strategies and reduced profitability. The goal is to have fast and reasonably accurate data to make informed decisions. The cost-to-serve approach aims to balance useful information with limited resources, time, and effort.
Focus on the customer.
Knowing your cost-to-serve per customer lets you decide on your approach to sales and revenue. A key customer that is profitable overall may be unprofitable for some items, but you may decide to accept that. If your profit from that customer starts to decline, the data can reveal what has changed and action can be taken.
Sustainability and the cost to serve
The cost-to-serve approach can support a range of sustainability initiatives. Pricing can be tailored to match customer needs while adhering to your own sustainability goals such as reducing energy use and limiting waste. Analyses can also be used to compare the cost of serving customers with different sustainability requirements, whether environmental or social.
Impact on profitability
Understanding customer costs allows adjusting pricing strategies for better profitability. Identifying inefficiencies, waste, and seasonal peaks in customer demand provides valuable insights. Logistics costs significantly impact the cost to serve, and pricing without considering them affects profitability. For instance, using an expensive transport solution on a low-margin item makes no sense.
Best practices include:
•Having a clear understanding of the costs associated with serving each customer.
•Establishing an accurate system for tracking and recording customer-related costs over time.
•Comparing the costs of serving different customers.
•Identifying areas of inefficiency and waste.
•Adjust operations and pricing strategies as circumstances change.
•Selecting the right partner and software solution
Assuming a blanket cost to serve customers carries risks, such as providing high service levels to a key customer without considering the overall cost or selling at a loss without reliable data. A holistic approach to understanding each customer’s value ensures business continuity. Cost to serve includes all relevant costs, from warehousing to product development, and includes the cost of returns.
SCCG has a history of helping clients develop a detailed understanding of how Cost-to-Serve, functions as a prerequisite for any organisation looking to manage its profitability. If you’d like to talk more about your cost-to-serve, send your message at info@sccgltd.com or call +44(0)1926 430 883.
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