Profitability of Cost to Serve
Profitability is becoming increasingly important and is a key focus across companies regardless of their sector or size. Due to the continued threat of global competition and unpredictable economic stability, it is of paramount importance that companies continue to look for ways in which to increase their overall profitability.
Cost-to-serve analysis seeks to empower business owners with the invaluable knowledge of the actual cost it takes to serve individual customers. This is especially important as customer demands continue to increase often squeezing companies for everything that they can get for their pound. This puts business owners at risk of giving more than they can afford to ensure that a customer remains loyal.
It is not as clean cut as companies may think, with the highest revenue customer isn’t always the most profitable and often these larger and more demanding revenues generating customers that can be having a negative financial impact on the company.
Used as a key tool in improving a company’s profitability, a cost-to-serve analysis is designed to provide insight into numerous aspects of the business and company’s transactional processes. From the profitability of actual products, customers and routes to market it will generate valuable insight from which to make factually based business decisions.
Often used in the pre-deal diligence for mergers and acquisitions, cost-to-serve is a key consideration during this process which often identifies hidden value in a company’s operations which often appears in the form of under-pricing or over-servicing customers.
The benefits of utilising a cost-to-serve approach enables company owners to gather information relating to the true cost of servicing an individual customer which assists in defining the value of the business and developing a long-term strategic plan in preparation of a company take over.
It also offers useful insight for post-close operations and short-term decision making regarding customer service levels, pricing incentives, promotional spend and internal resource structure and allocation.
This information enables effective customer segmentation to take place based on understood profitability figures which enables decisions to reduce services offered to ‘over-served’ customers or to adjust the pricing for those customers to ultimately improve the company’s profitability. It also identifies where other cost savings can be made within the operation of business, whether this is linked to; the logistics, staffing, marketing, or stock holding costs – a complete end-to-end process review can bring significant savings and increase overall profitability.
Simply put, the bottom line impact comes in one of two form from using cost-to-serve:
Cost savings from service reductions and more efficient internal resourcing
Revenue growth resulting from pricing increases—such as adding surcharges to urgent jobs
Many companies value and segment their customers according to revenue generation volume. Far fewer use profitability as a means of segmenting customers. To determine a customer’s actual value to the business, understanding the cost of serving that customer is paramount. Whether you are looking for ways to improve current operations or to facilitate a successful merger or acquisition, a cost-to-serve analysis can be a powerful tool for improving the bottom line.