Pricing Based on a Customer’s Value and Cost

Getting more and more customers isn’t the solution to bottom line woes. It’s all about getting the right customers. Do you know which ones are making you money, and which are costing you money? Determining the profitability of each of your buyers is essential for a healthy bottom line.

It means looking at a range of company tasks and the overhead expended to handle each customer. Here is a closer look at cost-to-spend, how to determine it and the benefits it provides.

It’s All About Cost-to-Serve

Cost-to-Serve means calculating how much it really costs your company to get your product or service to your customer. And that means a lot more than just transportation. The process is multi-faceted, involving factors that can get overlooked when actual costs are computed.

To make an accurate assessment of what each customer costs, it’s essential to consider:

  • Contact: calling customers, visiting, coming up with quotes
  • Processing: paperwork and other internal tasks
  • Packaging: from picking it off the shelf to getting it into a shipping container
  • Storage and handling
  • Transportation: this also includes delivery
  • Returns: managing the process in reverse
  • Marketing: breaking down these costs per customer
  • Payment

It is a detailed project, but worth the effort. When cost-to-serve is accurately calculated and allocated, you know who is making money for you and who is draining money.

Team Effort

Computing cost-to-serve for a customer is a team effort. You need to look at your customer from a variety of angles, like customer value, as well as their cost of service. Collectively, it’s a revised approach to customer value-based pricing.

The go-to people for determining customer value are in the sales, product and service areas. To get expert data about the cost of serving each buyer, you need to ask those in operations, finance and procurement.

In many companies, these diverse groups seldom meet up. But the ideas sparked in a comprehensive review are gold. Sharing fact-based information, not guesses or a sale person’s impressions, gives a company the precise data it needs.

The Many Benefits of Cost-to-Serve

After broad input and a detailed account review, management can start making choices about each customer. The results are logical decisions about which buyers to winnow out, and which to focus on.

The standard approach is to look at customers from the lifetime value angle. But with this data, you can see what it’s costing you to acquire and serve the customer, at each point in the sales process.

You can see right away how much profit you are getting from them today, not just over the account’s lifetime. It lets you take a strategic approach to customer decisions, like offering volume discounts to one or dropping another one entirely.

For example, which customer is a good prospect for discounted pricing? If the information shows a buyer is low maintenance and will deliver large profit margins, a discount is in order. But if the analysis shows another customer is not projected to produce significant profits over time, uses up your resources for training, returns, expedited delivery and other requests, it makes no sense to suggest discounts.

Getting Tactical with Pricing

With strategic pricing, based on your cost-to-serve calculations, you might choose to encourage a customer to switch to products producing a higher profit margin. You know when to renegotiate agreements, or simply increase your prices.

Your salespeople will know exactly which customers to focus on, and which should get a minimal amount of servicing. You can make well founded choices about who to drop.

You no longer need to make customer decisions in a vacuum. Based on profitability, you can logically decide about the levels of customer service, how much it’s worth to spend on promotions and incentives, and pricing for products and services.

It doesn’t stop there. They can rework resource allocation internally and make organizational changes that streamline the customer experience, while costing the company less time and money.

Cost-to-serve data is powerful. Sales and marketing teams can control profitability with better by handling customers according to the profitability they deliver. Smarter decisions mean a healthier bottom line.