What Is Cost to Serve?

Cost to serve is a tool businesses can use to evaluate the efficiency of their product offerings by determining how much it costs to bring products to consumers. They can evaluate the costs not just for each product in a lineup, but also for specific types of customers, to determine where they should focus their energies for the most profit. A business can conduct its own cost to serve analysis or ask a third party to do so, often as part of a larger audit of efficiency and business practices.

A number of factors contribute to cost to serve. The company must think about costs for product development, raw materials, packaging, storage, and transport. It may need to consider marketing, retail stores, and the role of product representatives and salespeople. A pharmaceutical company, for example, may spend a lot of money sending representatives to clinics, hospitals, and doctors offices to provide information about its products and encourage potential customers to make purchases.

In some cases, the cost to serve may yield a high profit, while in others, the process may be less efficient. For example, a company could find that offering packaging in different sizes comes at very high cost, but doesn't actually yield very much money, and it would be better to narrow down the product line, possibly only packaging things in one or two sizes rather than a wide range. The company might also determine that serving a particular group, such as customers in an extremely remote area or customers in a region where regulations require special packaging, isn't worth the cost to serve.

Companies must balance the cost to serve with the desire to reach as much of the market as possible and to respond to customer demands for new products, different packaging, and more features. An analysis before starting a new project may reveal valuable information about how much the company can provide before it starts running the risk of losing money. The cost to serve may also be an important factor in pricing; the company may need to charge more to make a product worth the work and investment, and customers might not be willing to pay for it.

This is only one parameter that a company should consider when deciding what to include in a product line and where to distribute those products. Flexibility in product design and distribution is critical, as the cost to serve may conceal other benefits, like the public relations coup in providing products to a remote area or a notable public figure.