What is Cost to Serve?

Cost-to-Serve (CTS) is a management approach that calculates the real costs involved in serving each customer, product or channel. Unlike traditional analyses that work on averages, CTS provides granularity by showing which customers or orders are actually profitable and which are loss-making.

The method makes it possible to identify hidden imbalances in the supply chain and correct faults that directly affect the contribution margin.

Why is the Cost to Serve strategic?

Many companies still make the mistake of treating all customers as if they had the same profitability profile. This leads to distortions in investments in logistics, promotions and customer service.

With CTS, the company can:

  1. Differentiate between high and low profitability clients;
  2. Evaluate the real cost of each distribution channel;
  3. Direct investments more intelligently;
  4. Increase operating margin by balancing service level and costs.
 
How to calculate the Cost of Serving

The calculation of CTS generally involves the application of methodologies such as Activity-Based Costing (ABC), which allocates costs according to the activities consumed in each order.

Basic steps:

  1. Mapping of logistics activities - transportation, warehousing, picking, customer service, etc.
  2. Identification of cost drivers - distance, delivery frequency, order volume, administrative complexity.
  3. Allocation of costs to each product, customer or channel.
  4. Analysis of individual and consolidated profitability.

Mosaic Tech emphasizes that the analysis must go beyond logistics to include commercial, service and even financial costs.

Main mistakes when calculating the Cost to Serve

These are common mistakes that jeopardize the process:

  1. Work with general averages and not with specific data per client/product;
  2. Ignore relevant indirect costs (e.g. returns, rush orders, billing complexity);
  3. Lack of integration between areas (sales, logistics, finance);
  4. Excessive focus on cutting costs, instead of seeking a balance with service levels.
 
Benefits of practical application

By applying CTS correctly, companies can:

  • Reduce logistics costs without jeopardizing the level of service;
  • Negotiate fairer contracts with customers and suppliers;
  • Defining freight and discount policies in line with profitability;
  • Segregate customers into strategic groups (high margin, medium margin, loss-making)

A Finext study shows that in the fresh produce sector, CTS is essential for dealing with shelf-life restrictions and reduced margins.

Global cases and trends

Companies from different sectors are already using CTS as a strategic tool. Large corporations use the method to align service policies with customer experience.
BlueGrace Logistics points out that the future of CTS is linked to analytics and artificial intelligence technologies, capable of automating analysis and generating predictive insights in real time.

Conclusion

The Cost to Serve is an indispensable tool for companies wishing to balance service level and profitability. By understanding the real costs per customer and channel, managers can make more assertive decisions, avoiding waste and increasing competitiveness.

At Linear, we help companies turn complex data into intelligent strategies.

By applying methodologies such as CTS in conjunction with forecasting and optimization solutions, it is possible to reach a new level of efficiency and profitability.

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