Pricing

Cost-to-Serve Recovery: 100% is Too Low

By James Marland
August 9, 2011

Pricing managers always say they want to move away from cost-based pricing and toward market or value-based systems. While I applaud that, there seems to be a blind spot when it comes to surcharge recovery. We set the bar too low: 100% recovery of cost-to-serve is a good first step, but 100% is just not good enough.

Distribution_Blog_ThumbnailCost-to-serve are costs such as freight, packaging, setup, and configuration, which are incurred when servicing a customer. To cover these costs, fees or surcharges may be levied. Companies then analyze the ratio of costs to charges and try to improve it.

A goal of 100% is too low.

This is an area rife with cost-based pricing, and as we have learned, we should be looking to charge the value a customer accrues from these services, not what it costs us.

 

Some examples:

We are asked to set up and calibrate a machine we sold. This means that it will use 5% fewer consumables in its first 6 months of operation. Our surcharge should reflect that saving.

We are asked to deliver a chemical directly to a customer’s line rather than a goods inward location. It takes our driver 30 mins longer but allows the customer’s line to be more efficient, increasing their throughput.

Calls to our help desk lead to fewer expensive breakdowns which could be quantified in more up-time for the customer.

Value-based selling: it’s too good to not use everywhere.

 

– James Marland

  • Cost-Based Pricing , Cost-to-Serve Recovery , High Freight Costs , High Payment Costs , High Service Costs , Pricing Managers , Surcharge Recovery , Value-Based Pricing , Value-Based Selling , Vendavo Profit Advisor

    James Marland

    James Marland is the Director of Business Consulting at Vendavo based in London. In this role he helps diagnose Pricing Opportunities and develops business cases for pricing projects with ROI models. James has been in the pricing software space for many years, both on the customer and supply chain side: so he has a view from “each side of the table”. Prior to his pricing career he was VP of Solutions at Ariba and has also spent 5 years at SAP America. He has a Bachelor of Science degree in Mathematics from the University of Southampton.