What is cost to serve?

The concept of cost to serve is a fundamental component in the analysis and strategy of countless companies today. As we will see, it tends to give special visibility and emphasis to relationships that are critical to the success of a store. However, this is not necessarily an obvious concept, and for many people it may still be an obscure idea.

In this article, we will explore how calculating cost to serve can give you a valuable perspective on a company's performance. As we will see, logistics and shipping orders are fundamental elements in cost to serve in modern digital commerce and, in the end, we will also address how InPost can make a difference in your store's logistics approach.

Definition of cost to serve

This term refers to the cost, for a company, of meeting a consumer's demand. In other words, it is the cost of providing the product or service that the customer buys, from the beginning of the supply chain until it ends up in their hands.

Difference from other types of costs

Cost to serve represents a specific perspective on a business's process and performance. It is useful to compare cost to serve with two other measures that, focusing on different variables, offer a different analytical angle as well.

Total cost encompasses, as the name suggests, all costs, including indirect costs such as advertising, market research, etc., which may be necessary for the business to operate, but not for customer satisfaction itself.

Cost of goods sold, on the other hand, encompasses all costs associated with creating the product, such as raw materials, human resources, and maintenance, but excludes logistics and distribution.

Why calculate cost to serve?

Understanding how to meet consumers' expectations without compromising profitability involves navigating market fluctuations and tackling complex challenges. The cost-to-serve model helps bring clarity to the different variables and the costs associated with them.

Identifying products with a low profit margin or inefficient processes makes it easier to establish the right strategy. It is not uncommon, for example, to discover that a significant proportion of customers are loss-making, another is extremely profitable, and a large share, such as half or more, represents a financially neutral outcome. However, it is important to note that the goal is not simply to exclude customers that represent a loss: companies that do so find that an equivalent number of the remaining ones, in turn, become loss-making, as a consequence of the fixed costs of keeping them constant.

The benefits of the cost-to-serve model

The objectives of carrying out this type of analysis exist at several levels:

• Understanding the real cost of serving each customer: this also includes understanding the different components that make up these costs and establishing the profit margin for different customer groups.
• Customer satisfaction: a clear view of the cost of meeting demand for a product or service allows a company to better align with the public's preferences.
• Transparency: improved visibility over the entire supply chain and over the implications of actions or measures.
• Decision-making: cost-to-serve analysis makes it possible to detect problems and areas of inefficiency, as well as identify opportunities and make informed decisions – relating, for example, to pricing, production, etc.

How to calculate cost to serve

Calculating cost to serve involves gathering the different relevant factors, which can depend greatly on the type of company. Cost to serve is simply the sum of the cost of these factors divided by the number of customers. It is often calculated only for a customer segment.

It can obviously be complex to discern some of the costs: for example, what handling cost corresponds to a given product.

The most common variables are:

• Production (including raw materials, human resources, waste disposal, quality control, and other expenses)
• Expired shelf life (in the case of perishable products)
• Taxes
• Transport and storage
• Returns

The impact of transportation and InPost's service

For any type of business that involves selling a product, transportation is a variable with a fundamental weight in cost to serve. This applies even more in the case of e-commerce stores, for which order shipping logistics is a central focus of attention.

InPost specializes in shipping parcels not to the home, through the use of a vast pickup point network. This is a highly efficient way to approach shipping orders in digital commerce, which is growing more and more and stands out for its flexibility and convenience for the recipient, for its environmental benefits, for its agility and competitive prices.

Logistics is a fundamental element for your cost to serve and for the success of your business. Visit our website to learn more about us and transform your approach to shipping orders.