Blog · Board and management reporting · Distributors
The honest answer to what cost to serve a distributor or supplier should run per customer: the 8 to 15 percent of revenue figures quoted depend on which costs are allocated, on the driver used to allocate them, and on whether cost to serve is read against revenue or against gross margin. This page gives the ranges by desk, the three measurable things that set the right figure for one business, and the table to compute before anyone quotes a percentage.
Cost to serve is what it costs to supply a customer beyond the goods, and what it should be depends on three things the business can measure.
| Desk | Cost to serve, percent of revenue, overall |
|---|---|
| Industrial and electrical distribution | 8 to 14 percent |
| Builders' merchant | 9 to 15 percent |
| Foodservice distribution | 12 to 20 percent |
| Medical supplies distribution | 7 to 12 percent |
| CPG direct to retail | 5 to 10 percent |
| Manufacturer direct | 4 to 8 percent |
The cost to serve by industry hub covers what is in the cost on each.
| Cost | Driver | Rate, from the business's own costs |
|---|---|---|
| Delivery | Drops | $38 per drop |
| Order processing | Order lines, by channel | $1.90 per keyed line; $0.20 per portal line |
| Sales time | Visits and calls logged | $85 per visit; $12 per call |
| Returns | Return lines | $14 per line |
| Credit | Days beyond terms × balance × cost of capital | 8% a year |
Each rate is the cost pool divided by the driver's total count, from the business's own ledger. The sum allocated equals the pools: that is the identity.
| Customer | Revenue | Drops | Keyed lines | Visits | Cost to serve | Percent of revenue |
|---|---|---|---|---|---|---|
| A | $400,000 | 52 | 600 | 6 | $3,626 | 0.9% |
| B | $90,000 | 250 | 2,400 | 12 | $15,080 | 16.8% |
| C | $12,000 | 104 | 300 | 4 | $4,862 | 40.5% |
The business's average may be 10 percent. B and C are why, and A is paying for them.
| Customer | Gross margin | Cost to serve | Contribution | Contribution percent |
|---|---|---|---|---|
| A | $72,000 (18%) | $3,626 | $68,374 | 17.1% |
| B | $22,500 (25%) | $15,080 | $7,420 | 8.2% |
| C | $3,600 (30%) | $4,862 | −$1,262 | −10.5% |
C has the best gross margin percentage in the book and loses money. Cost to serve over gross margin, 5 percent, 67 percent and 135 percent, is the ratio that ranks them. Over 100 is a loss-making account.
| Measure | Formula | From |
|---|---|---|
| Driver counts per customer | Drops, lines by channel, visits, return lines, days beyond terms | Delivery, order, CRM, returns, AR files |
| Rate per driver | Cost pool ÷ total driver count | Ledger and the counts |
| Cost to serve per customer | Sum of count × rate | Above |
| Contribution | Gross margin − cost to serve | Ledger |
| Cost to serve ÷ gross margin | The ranking ratio | Above |
| The behaviour | Largest driver per loss-making customer | Above |
| Identity | Sum of allocated cost = sum of pools | Above |
Allocated by revenue. Every customer at 10 percent; nothing learned.
Read against revenue. C's 40 percent noticed; B's 17 percent on a 25 percent margin not.
Average only. A subsidising C for years.
Customers dropped rather than re-served. C is a minimum order value away from profit.
A good cost to serve is one allocated by activity drivers, under half of gross margin on the accounts that matter, with no account above 100 percent of its margin without a decision on file. Overall, 8 to 15 percent of revenue is normal range for distribution. The per-customer contribution table, with the behaviour beside each loss-making account, is the output. Covirage computes it from the delivery, order, activity, returns and receivables exports every month with the identity checked.
The ones that vary with how the customer behaves: deliveries and drops, order lines keyed, sales visits, returns handled, credit days taken, special handling. Not the cost of the goods, which is in gross margin, and not fixed overhead that no customer's behaviour changes. The list is stated, with the driver for each.
Because it assumes the answer. If delivery cost is spread by revenue, every customer has the same cost to serve percentage and the measure shows nothing. Allocated by drops, a customer taking five small deliveries a week carries five deliveries' cost, and its percentage is four times the customer taking one large one. The driver is the measure.
Change how it is served before changing whether it is. Minimum order value, fewer delivery days, a delivery charge under a threshold, moving order entry to the portal. Most loss-making accounts are one behaviour away from profitable. The table shows which behaviour.