WORKSHEET #16: Estimating the Core Customers’ Life Cycle Costs Per Unit
Step 1:
Select a representative example customer from the largest Core customers the company seeks to serve. This project will be much easier if a customer would agree to help you with the cost estimates in this analysis.
Step 2:
Estimate the absolute total costs the customer incurs over the entire life cycle of the product, from the customer's consideration of acquiring the product until the customer finally disposes of the product. Some of these costs are one time costs, such as the customer's evaluation of a supplier. Other costs vary with number of units. For example, the cost of maintenance is probably a per unit cost. Pay particular attention to the fixed, or one time costs, that the customer incurs over the life of the product and then estimate the variable cost per unit of product that the customer incurs.
Step 3:
Allocate these costs to the categories of Acquire, Use, Maintain and Dispose (A,U,M,D) for Final customers and Obtain, Sell, Guarantee and Return (O,S,G,R) for Intermediary customers. The price of the product should be included as part of the Use cost for a Final customer and Sell cost for an Intermediary customer.
Step 4:
Define the alternative uses the customer might make of the product. This step may not be necessary. If this step is not necessary, skip the next step.
Step 5:
Evaluate how the costs of Acquire, Use, Maintain and Dispose or Obtain, Sell, Guarantee and Return would change, depending on the alternative uses the customer makes of the product. Pick the customer’s lowest cost use of the product.
Step 6:
Estimate the average annual units of purchase the customer makes of the product.
Step 7:
Divide the total fixed, or one time costs the customer incurs in Acquire, Use, Maintain and Dispose or Obtain, Sell, Guarantee and Return by the total units of the product the customer purchases over the shorter of the life of the product or of the customer relationship. Add to these unit costs to the per unit cost you estimated in Step 2. This produces the total cost per unit for each major cost the customer incurs with the product. These costs are directly comparable with the price of the product.
Step 8:
If the customer has other uses of the product, calculate the four categories of customer cost with each of the other uses of the product.
Step 9:
Define the Base Case as the total per unit cost by customer cost category of the lowest cost use of the product. Use this Base Case in Worksheet #17: Creating Potential New Products and Services.