Cost to Serve

• Read Video Transcript

  I've worked with over 500 companies,
  and I've yet to find companies
  that cannot improve
  if they do the right things.

  If they identify the right strategy
  and they implement the right execution,
  almost every business can improve
  and improve significantly.

  My name is Larry Goddard.
  I'm the CEO of the Portland Group,
  a consulting firm based in Cleveland,
  Ohio, that works with companies
  to improve their performance,
  profitability and value.

  When comparing one customer
  to another customer,
  this goes to the inadequacies
  of accounting systems.
  You could have two
  customers that buy $100,000 a year
  from you, and your accounting system
  tells you that you make 30% gross profit
  margin from both of those customers.

  But in actual fact,
  there's a concept called cost to serve.
  The reality is that
  some customers are easy
  to do business with,
  and some customers are not easy
  to do business with.
  And these costs to serve are generally
  not captured in accounting systems.

  So in a given example, let's say customer
  A orders in lots of $10,000
  and customer B orders in lots of $2,000,
  you've got a lot more work to do
  for the customer that orders in $2,000
  lots than the one that orders
  in $10,000 a lot in terms of scheduling,
  production planning, efficiencies.

  The true
  profitability on customer A is going to be very different
  from customer B, but very few accounting
  systems are going to identify that.

  So we help companies identify the true
  cost to serve individual customers
  and then understand
  their true profitability as opposed to
  what their accounting system tells them.

Many businesses assume all customers are equally profitable, but that’s rarely the case. Traditional accounting systems often fail to capture the true cost of serving different customers. In this video, Larry Goddard introduces the concept of cost to serve, explaining why two customers with identical revenue can have vastly different profit margins.

While financial reports might show both customers providing a 30% gross profit margin, deeper analysis often reveals hidden costs that dramatically impact real profitability. For example, one customer may place bulk orders in large quantities, while another places frequent small orders that require more processing time and resources. The difference in service requirements, logistics, and operational inefficiencies can significantly alter a company’s bottom line. Larry shares practical strategies for identifying and optimizing customer profitability, allowing businesses to focus on high-value clients while reducing costs associated with inefficient accounts.

If you’re looking to enhance profitability and allocate resources more effectively, this video provides essential insights on how to uncover the true cost of doing business with each customer. Watch now to learn how understanding your cost to serve can transform your company’s financial health!