Cost to serve and the customer portfolio

What the model has to include

Order handling, where small orders cost nearly as much to process as large ones. Picking and packing complexity including special handling. Freight, particularly where a customer requires split deliveries or expedited shipping. Returns and credits, which concentrate heavily in a small number of accounts. Payment terms and collection effort, which are a real cost of capital. And account management time, which is the hardest to allocate and frequently the largest.

The technical build is not the difficult part. Getting the commercial team to accept the allocation basis is.

• Order processing driven by order count or line count where entry effort varies
• Picking and packing weighted for special handling and custom labelling
• Freight at consignment level where invoiced, driver-based where not
• Returns as line count plus a fixed handling cost per return event
• Account management tiered by account class rather than allocated flat

Designing for acceptance

Our advice is to be conservative and transparent. Use activity drivers people recognise — number of order lines, number of deliveries, number of returns — rather than a sophisticated model nobody can follow.

Publish the drivers alongside the result so anybody can see why an account scored as it did. An account manager who can see the reasoning will argue about the driver, which is a productive conversation. One who cannot will reject the number entirely, and rejection is difficult to reverse.

Then sense-check the extremes with people who know the accounts. The most and least profitable customers in the model should be recognisable to the commercial team; if they are not, something in the allocation is wrong and it is better to find that before publication.

What the model usually reveals

Two things, reliably. A group of accounts that look healthy on gross margin and consume disproportionate resource. And a group of small accounts that are quietly excellent because they order predictably and never call.

Neither is actionable in isolation. The value is that the commercial conversation shifts from 'grow revenue' to 'grow the right revenue', which is a different and considerably more useful discussion.

It is worth being explicit that the productive responses are rarely to exit customers. Ordering minimums, delivery consolidation, a change to payment terms, a self-service channel for routine orders, or a straightforward price adjustment with the reasoning explained. Most customers who are expensive to serve do not know they are, and a proportion will change behaviour when asked.