Cost-to-serve (CTS) is the real, full cost of serving a given customer, product or channel, accounting for every activity involved: logistics, transport, order handling, returns and service. It reveals the true margin, which can differ greatly from the apparent one based on sale price alone.
Why it matters
Customers and products with the same revenue can have very different cost profiles: those who order small quantities often, request urgent deliveries or have many returns “cost” more. Without a cost-to-serve analysis, an apparently profitable customer can actually erode margin.
Where it applies
It’s especially useful in low-margin, logistics-intensive sectors such as pharmaceutical intermediate distribution. You build it by allocating costs (including vehicle cost per kilometre and TCO) to individual service activities. For a concrete case, see the cost-to-serve of a pharmacy.
FAQ
What’s the difference between margin and cost-to-serve?
Commercial margin looks at price minus product cost; cost-to-serve adds all service costs (logistics, deliveries, returns), showing the real profitability per customer or channel.
How do you calculate cost-to-serve?
By allocating activity costs (warehouse, transport, order and returns handling) to individual customers/products based on how much each actually consumes, not on an average.