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.« Back to Glossary Index
Cost to Serve
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With over 800 Procurement specific terms (and growing) you will find everything you need to know or thought you knew about the Procurement function. Our aim is to provide you with a comprehensive list collated from the Comprara Groups hub of training and consulting source materials.The Procurement Glossary has been compiled by industry expert Paul Rogers.