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Position · Diagnose, Plan

Cost-to-serve analysis

Allocates the cost of serving to the customer, channel or product that causes it. The usual finding is that a fifth of the customers consume most of the margin, and nobody knew which fifth.

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Stage
01 Diagnose, 04 Plan
Works at
Business, Department
Maturity
Scaling → Large organisation
Time
One to two weeks if the cost data exists

What it is

An allocation of operating cost to the thing that actually causes it, rather than spreading it evenly as a percentage of revenue. Order frequency, drop size, returns rate, payment terms and support intensity vary enormously between two customers who look identical on the gross margin line.

Cost drivers, not cost categories
What makes the cost happen — a delivery, a return, a support call — rather than which department's budget it lands in.
The activity map
Which activities each customer or channel consumes, and how often. This is the work, and it is where the surprise nearly always is.
Allocation basis
How each pool of cost attaches to a driver. State it explicitly, because the basis is where the argument will be once the answer turns out to be unwelcome.
The distribution
Fully costed margin, ranked. The shape matters more than any individual number, and it is almost never flat.
Cause
Whether a cost is driven by the customer's behaviour or by your own process. The two have completely different remedies, and confusing them turns a service problem into a pricing row.
The mistake people makeAllocating overhead as a percentage of revenue and calling it cost to serve. That guarantees the largest customer looks the most expensive to serve, which is exactly the conclusion the analysis exists to test.
What it’s forMargin is falling and the mix has changed, or price is being set without knowing what service actually costs.
What it’s not forYou have one product, one channel and one kind of customer. Then the average is the truth.

How you run it

  1. Pick the unit of analysis and hold itCustomer, channel or product — one of them. Mixing two produces a matrix that is interesting and impossible to act on.
  2. Find the drivers before touching the ledgerTalk to operations first. The costs that vary between customers are rarely the ones the P&L is organised around.
  3. Allocate on cause, and write down the basisEvery allocation is contestable. Stating the basis on the page turns the argument into one about method rather than about motive.
  4. Rank it and look at the shapeThe tail is the finding. A long negative tail changes pricing, service design and sometimes who you are willing to sell to.
  5. Separate their behaviour from your processA customer ordering daily in small drops is a pricing conversation. A process that cannot handle small drops is an internal one, and it is not their bill to pay.

The prompt

Two ways to run it

Run this tool in your own Claude

The short prompt starts your partner against the library on your disk. The long one carries everything with it and needs nothing installed.

🔒 Prompt locked

Everything above is free — what this tool is, what it is for, what it is not for, and how to run it as a workshop. Three tool prompts a month are free with an account; beyond three, and for the printable canvas, it is the paid part.

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Your playbook

It lands in the earliest stage this tool suits. Move it on the Playbook page.

You’ll need

  • Revenue and gross margin by customer, channel or product
  • The activities that consume cost — picking, delivery, returns, support, credit
  • Volumes and frequencies for each of those activities

You’ll end up with

  • Fully costed margin by customer, channel or product
  • The distribution, which is usually a long tail of loss-makers
  • Which costs are driven by the customer's behaviour and which by your own process

Runs well with

AI operating model optionsAI risk classification and governanceAlliance and partnership designAnalysis plan