Two customers, the same sales: why one wholesale account costs more to serve

Two customers each buy £10,000 of goods a month at the same gross margin. One places four tidy orders. The other sends twenty small orders, frequently changes delivery instructions and needs several invoices corrected. A turnover report makes the accounts look equal. The work required to serve them tells a different story.

Cost-to-serve analysis makes that work visible. It helps a wholesaler decide whether to change order patterns, service levels or commercial terms. It should be established as a periodic review process, with agreed definitions and ownership, rather than used as a hurried justification for charging a customer more.

Start with the purpose of the calculation

Decide whether the business is reviewing long-term account profitability, a new contract or an immediate order. The relevant costs can differ. A full account review may allocate warehouse and service capacity; a decision about one extra order may focus on the costs and constraints that the order actually changes.

Finance owns the costing method and ensures consistent treatment. Operations supplies activity information. Account managers explain customer requirements and contractual commitments. The authorised commercial manager decides any proposed changes to terms. This keeps the exercise from becoming a negotiation between competing spreadsheets.

ACCA's guidance on activity-based management explains how customer profitability analysis can allocate overheads using the activities customers require. The principle is particularly useful in wholesale, where order frequency, picking complexity and delivery arrangements may vary substantially between accounts with similar sales.

Choose a few cost drivers that explain the work

Begin with material activities for which reasonably reliable data exists. Order-processing cost might be associated with the number of orders. Picking can depend on lines, cases or units, depending on the operation. Delivery needs a method appropriate to the route and service. Customer-service work may be better measured by handling time than by email count.

Avoid charging the same activity twice. If a fulfilment provider's per-order fee already includes standard packing, adding another allocation for the same packing work exaggerates the cost. Document what each rate contains and excludes.

Separate ordinary service from preventable errors. A customer may generate many calls because the wholesaler repeatedly sends incomplete deliveries. Labelling that customer expensive without identifying the cause would reward the wrong behaviour. The analysis should show both the work performed and why it occurred.

A worked comparison

The following monthly example is deliberately simplified. Both customers generate £10,000 in net sales and £2,000 in gross profit after the product costs used in the business's calculation. Assume the activity rates below have been developed consistently from the operation. They are illustrative, not industry benchmarks.

The £928 difference is the result of this model. It is not a claim that Customer B loses money, and neither contribution figure is net profit. Other costs remain outside the example, such as costs not included in the selected activity rates, financing where relevant and business-wide expenses.

The comparison nevertheless identifies a useful question: can Customer B receive a similar service outcome with fewer separate deliveries and less duplicated work?

Test a service change before changing the relationship

Suppose Customer B can move to eight planned deliveries a month without losing necessary availability. At the example's £35 rate, the modelled delivery allocation falls from £700 to £280, a difference of £420. That estimate is a starting point for a proposal.

Operations must check what would actually change. If deliveries are purchased separately from a carrier, fewer consignments may reduce charges directly. If the business runs its own vehicle on a route that continues regardless, the immediate cash saving may be smaller. Capacity may still be released, but released capacity and cash saved should be reported separately.

The customer may need help consolidating orders, a fixed cut-off, agreed standing quantities or better stock visibility. Those are commercial options to discuss within the relationship. A sudden delivery charge imposed without checking the contract is not a substitute for that conversation.

Check which exceptions are commercially justified

Some accounts legitimately need a more expensive service. A new customer launch may justify temporary support, or a particular delivery schedule may be part of a profitable wider agreement. Record the reason, expected benefit, approving authority and review date.

A strategic explanation should be specific enough to test. “Important account” does not establish whether repeated extra deliveries are worthwhile. A documented launch commitment, expected recurring volume and a time-limited service plan give the reviewer something concrete to assess.

Keep routine service changes separate from corrections. If the wholesaler causes a short shipment, the resulting redelivery should be visible as a failure cost. It should not automatically be presented as evidence that the customer's agreed ordering pattern is uneconomic.

Use the results to improve the offer

The review may support several responses: retain the current service, simplify the process, agree scheduled deliveries, introduce an optional paid service or revise future prices. The appropriate choice depends on the account's requirements, contribution and the business's available capacity.

Account managers need a customer-facing explanation grounded in the service offered. A proposal for two predictable delivery days can be easier to assess than a vague claim that the customer is “too costly”. Where the change affects existing commitments, obtain the required agreement before implementation.

Review the outcome after a defined period. Check whether activity fell, whether the customer retained the necessary service and whether the expected financial benefit appeared. Update the rates when the operation changes materially; an old average can mislead just as easily as an inaccurate sales report.

The aim is to understand how the business earns its contribution and where effort can be reduced sensibly. Equal turnover does not imply equal economics. A fair cost-to-serve process gives both the wholesaler and the customer a better basis for agreeing how the relationship should work.

Reference: ACCA, Activity-based management. The wholesale example, rates and calculations are original illustrations, not benchmark costs.