Here’s something that catches a lot of businesses off guard. They assume their biggest customers are their most profitable ones. Often, they’re not. Customer contribution analysis is the process of working out the true profitability of each customer, order, or channel after you’ve stripped out all the costs associated with serving them, particularly logistics costs.
Most financial systems will tell you the gross margin on a sale. But they won’t tell you what it actually cost to pick, pack, and deliver that order. And that’s where the picture changes dramatically.
A customer placing frequent, small orders might look fine on a P&L, but once you factor in the real cost of each delivery, the margin can all but disappear.
I’ve seen this play out time and again over the years. In fact, we recently published an analysis that illustrates the problem perfectly.
What is Cost To Serve?
Cost To Serve is essentially the process of working out what it actually costs you to fulfil orders for a specific customer. Not just the product cost and freight, but everything — warehousing, picking, packing, delivery, returns, even the admin time spent processing orders and chasing invoices.
Most businesses have a rough idea of their average logistics costs, but the reality is those costs vary massively from one customer to the next. A customer ordering full pallets once a month is a very different proposition to one ordering three cartons twice a week.
How We Analyse Customer Contribution
Building on our techniques and capabilities in Activity Based Costing (ABC) and Cost To Serve (CTS), Logistics Bureau are able to provide in depth analysis of customer contribution analysis.
This approach can get down to the level of individual customers, market segments or customer channels, and identify the real contribution made by customers as opposed to what is reported by business financial systems.
In this example, our consultants have identified that many customer deliveries are made through the year, that deliver minimal profit once logistics costs have been deducted from the sales value of the orders.
Chart – Gross Margin Remaining
In this case, the company had a vast customer base that demanded frequent and small deliveries. The result… poor profit, due to the high unit cost of delivery.
This type of customer contribution analysis can be carried out at a range of levels, such as:
- Profit by customer.
- Profit by order.
- Profit by channel.
The solutions to this type of problem obviously depend on the unique aspects of the company, its customers and its products, but could involve:
- Imposing minimum order sizes.
- Incentivising customers to place larger orders.
- Ensuring that customers who are supposed to pay for delivery, actually do so. (Often the smaller accounts).
- Reviewing the logistics processes to reduce costs.
Is Your Customer Base Really Profitable?
The thing is, most businesses have never done this analysis. They look at revenue, maybe gross margin, and assume they know which customers are making them money. But until you’ve stripped out the real cost of serving each customer, you’re guessing.
If you’re not sure whether your smaller accounts are actually costing you money, or you suspect your delivery costs are eating into margins more than they should be, it’s worth finding out. We can help you run a full customer contribution analysis and identify where the profit is actually coming from — and where it isn’t.
Get in touch with our team to find out more.
