At Enchange we have been delivering a lot of Cost to Serve (CTS) work for clients in the last few years.

In all cases our work has resulted in considerable savings for clients.

I thought now would be a good time to write about this very important topic.

Before I get to a list of Top 10 tips when looking at CTS, let me start with some of the basics concepts:

What is Cost to Serve

Cost to Serve is a financial metric used to determine the total cost of delivering a product or service to a customer. It helps businesses understand profitability at a granular level by breaking down costs across different customers, channels, and service levels.

Why is Cost to Serve Important?

• Identifies unprofitable customers or channels.
• Helps in pricing strategies and margin optimization.
• Aids in route-to-market (RTM) efficiency by optimizing logistics and service levels.
• Supports contract negotiations with distributors and retailers.
• Improves customer segmentation by aligning service levels with profitability.

What are the Components of Cost to Serve

CTS is categorised in a number of different ways.  Here is one approach.

1. Procurement Costs – Costs of sourcing products or raw materials.
2. Warehousing & Storage – Costs related to inventory handling, storage, and stock replenishment.
3. Order Processing – Costs of managing customer orders, invoicing, and administration.
4. Distribution & Logistics – Transportation, last-mile delivery, and handling costs.
5. Sales & Customer Service – Cost of account management, support, and field sales.
6. Returns & Claims – Costs associated with product returns, damaged goods, or service failures.

Cost to Serve Calculation

CTS is typically calculated at different levels, depending on how the data is going to be used:

• Per customer
• Per product
• Per channel
• Per order size

How to Optimize Cost to Serve

1. Customer Segmentation – Offer differentiated service levels based on profitability.
2. Optimized Logistics – Consolidate shipments, improve route planning, and use cost-effective delivery methods.
3. Automation & Digitization – Reduce manual processes in order processing and customer service.
4. Channel Profitability Analysis – Focus on profitable channels and re-negotiate terms with costly ones.
5. Lean Inventory Management – Reduce stockholding costs with demand-driven replenishment.

Top 10 Tips for Cost to Serve

When determining the Cost to Serve (CTS) for a Route to Market (RTM), it’s crucial to ensure accuracy, practicality, and actionable insights. Here are 10 practical tips to consider:

1. Define the Scope Clearly

• Identify whether you are calculating CTS per customer, per product, per channel, per region, or per order size.
• Align it with your business goals (e.g., improving margins, optimizing logistics, negotiating distributor contracts).

2. Categorize Direct & Indirect Costs

• Direct Costs: Freight, warehousing, order processing, distribution, sales commissions, and marketing support.
• Indirect Costs: Administration, customer service, returns handling, and sales management overhead.

🔹 Tip: Assign costs based on actual usage, not broad allocations.

3. Segment Customers and Channels

• Not all customers and channels cost the same to serve.
• Group them by: Order frequency & size (e.g., bulk buyers vs. small retailers) Delivery method (direct vs. distributor) Service expectations (e.g., premium support vs. standard)

🔹 Tip: Use a Pareto approach—focus on the 20% of customers or channels that drive 80% of costs.

4. Map the End-to-End RTM Process

• Document each step in your supply chain: sourcing, storage, transport, order processing, and returns.
• Identify cost drivers at each stage.

🔹 Tip: Visualize with a cost-to-serve process flowchart to pinpoint inefficiencies.

5. Capture True Logistics & Distribution Costs

• Consider: Full-truckload (FTL) vs. less-than-truckload (LTL) shipments Drop size vs. frequency of delivery Regional variances in fuel, tolls, or duties

🔹 Tip: Identify if you are making too many small deliveries or servicing unprofitable geographies.

6. Measure Hidden Costs (Returns, Discounts, and Stock Holding)

• Reverse logistics (returns, replacements, or damages) can eat into profitability.
• Consider discounting strategies and their impact on net revenue.
• Account for slow-moving stock and high inventory holding costs.

🔹 Tip: Apply ABC analysis—categorize products based on movement rates.

7. Factor in Sales & Customer Service Effort

• Account for: Sales team visits & time spent on specific customers Customer service interactions (complaints, queries, reorders) Training & promotional support required

🔹 Tip: Use Time-Driven Activity-Based Costing (TDABC) to measure actual time spent per customer.

8. Differentiate Between Profitable and Unprofitable Customers/Orders

• Low-margin, high-effort customers may cost more than they contribute.
• Analyze profitability per order and decide on minimum order quantities (MOQs).

🔹 Tip: Consider tiered service models—offer premium service only to high-margin customers.

9. Leverage Data & Technology for Accuracy

• Use ERP, CRM, or Business Intelligence (BI) dashboards to pull real-time CTS data.
• Ensure that costs are not averaged but tracked per channel/customer type.

🔹 Tip: A heatmap of CTS by region/channel can highlight inefficiencies.

10. Regularly Review and Adjust CTS Strategy

• CTS is not static—review it quarterly or semi-annually.
• Optimize: Routes & delivery schedules Distribution partnerships Pricing & discount structures

🔹 Tip: Set KPIs for cost efficiency—e.g., cost per order, cost per revenue %.

Cost to Serve analysis is always a valuable exercise that always delivers major cost and margin benefits.

If you’d like to explore how Cost to Serve can transform your Route to Market, please do contact me.

I would also love to hear your thoughts!  Do you use Cost to Serve in your Route to Market and with your distributors?  If so, what advice could you offer fellow professionals.