Plain definition
Cost to serve measures the resources used to supply and support a customer, channel, or order. It can include picking, packing, delivery, returns, account support, and collection work. These costs explain why customers with the same sales and product margin can contribute very different amounts to the business.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
Suppose two customers each buy of goods with product cost of in a month. Customer A places one scheduled order and costs to serve. Customer B places many urgent orders, requests repeated returns, and costs to serve. After these measured service costs, A contributes and B , before remaining company overhead.
The comparison does not automatically justify dropping B. Some support costs would remain if B left. It does show where a minimum order size, a delivery schedule, or a separate urgent-delivery charge could improve the relationship.
| Sales | |
|---|---|
| Product cost | |
| Service costs | |
| Remaining before other company overhead |
Define the boundary beside the result. Include each cost once, and keep product cost separate if it has already been deducted in gross margin.
Why it matters
Sales growth can hide the cost of fulfilling promises. A customer may look attractive at gross margin while consuming delivery and support capacity that other customers pay to use.
Practical consequence
Map the service activities, count what drives them, and assign costs on a consistent basis. Discuss costly requests with the account team before changing terms. For a decision to stop serving a customer, distinguish costs that would actually disappear from allocated salaries or facilities that would remain.