Cost to Serve

The full cost the company incurs, on behalf of a particular customer or customer segment, to create and make a product and then sell and service the product and customer relationship.

Example 1:

There are significant variations in the costs of serving different customers. The service value added, measured by the ratio of the sales price to the manufacturing cost on waxed paper cups, ranges from 137% for national accounts, to 150% for vendors and contract feeders, to 167% for distributors. (Year 1988-SIC 2656)

Explanation:The costs over and above the costs of manufacturing indicate that the separate market segments, i.e. national accounts, vendors and contract feeders, and distributors have differing Cost-to-Serve for this company.

Example 2:

Dillard's sticks to "safe" brands like Liz Claiborne: less markdowns if it doesn't sell, vs. private label goods that would have to be discounted more. (Year 1992-SIC 5311)

Explanation:Dillard's has determined that its Cost-to-Serve customer segments who will buy well known brand names is lower than the Cost-to-Serve customers who prefer to purchase private label goods.

Example 3:

Most of the stores Family Dollar will open this year will be in existing markets. Clustering stores in those areas lets Family Dollar leverage distribution and management costs. There's less need to hire more district managers. (Year 2001-SIC 5331)

Explanation:Family Dollar has determined that its Cost-to-Serve customers who are located near other stores is lower than the Cost-to-Serve of customers at greater distances.

Example 4:

The cost of keeping a car in rental fleet is $12 a day. In-terminal specialists, such as Hertz, concentrate on business travelers. Alamo targets vacationers. (Year 1987- SIC 7514)

Explanation:The two rental companies have found different advantages in Cost-to-Serve. Hertz has found its lowest Cost-to-Serve with business travelers arriving in airline terminals. Alamo's lowest Cost-to-Serve is with leisure and vacation travelers.

Example 5:

Frito-Lay's emphasis on supermarkets has left smaller channels, such as convenience stores and small drug stores, open for service from smaller niche players. (Year 1994-SIC 2096)

Explanation:The supermarkets are Very Large customers for Frito-Lay. This channel has a very low unit Cost-to-Serve compared to the costs the company would incur with convenience stores and small drug stores.