costtoserve

Cost to serve, often abbreviated as C2S or cost-to-serve, is a management accounting concept used to determine the true cost of serving a customer, product, or channel. It goes beyond the average cost per unit by allocating both direct and indirect costs to specific customers and services, enabling more accurate profitability analysis and decision making.

Methodology typically involves defining the scope (which customers, products, and service levels are included), identifying activities that consume resources (order processing, picking, packing, transportation, customer service, returns management), and assigning costs to these activities using activity-based costing or other drivers. Costs are then allocated to customers based on their activity usage, producing a cost-to-serve per customer, product, or channel.

Applications and benefits include improved profitability visibility, appropriate pricing and contract design, targeted service level offers, channel optimization, and cost reduction opportunities. It supports segmentation of customers into profitable and unprofitable groups and informs strategic decisions such as whether to modify services, renegotiate terms, or discontinue relationships. Typical steps include data gathering, model building, validation with historical results, scenario analysis, and governance to keep the model current.

Limitations include data quality requirements, model complexity, and the potential for misinterpretation if overheads are allocated inconsistently. It is often used alongside other analytics such as customer profitability analysis and activity-based costing, and is related to broader supply chain cost management.