Cost to Serve

Cost to serve is an approach to customer accounting that calculates the true profitability of a customer, based on the total costs of supporting that customer. Just as different products have different cost structures, so customers may have different cost profiles. For example, Customer A may contract annually and arrange for 12 monthly drops against a delivery schedule updated quarterly. The customer has one decision maker who seeks technical support on average once every 90 days. Customer B may buy hand-to-mouth, with ad-hoc orders which are always ‘panic buys’ with short lead times, and have a total of 26 drops in the last 12 months. There are three technical officers who seek regular guidance and each seeks technical support at least once a month. Assuming that both customers purchase identical volumes, the ‘cost to serve’ of each customer will be very different. A pricing regime that is based on volumes will charge both the same price, while the real profitability of Customer A will be higher than that of Customer B. A ‘cost to serve’ approach would price the same product at a higher price to Customer B than to Customer A if the supplier wanted to achieve the same profitability. See also Service Level.