Identifying Costs to Serve in Distribution

Overlooked Costs to Serve: Why Not All Customers Are Created Equal

Margins are tight, freight isn’t cheap, and everyone wants “special pricing.” Too many distributors still price on volume or relationships instead of the hard truth in their invoices. This guide shows a practical, invoice-driven way to spot overlooked cost to serve (CTS), the six CTS metrics you can calculate straight from invoiced transactions, and how to use epaCUBE to segment and price customers based on what they really contribute — not just how loud they are on the phone.

What “Cost to Serve” Means (and what it doesn’t)

Cost to Serve (CTS) is everything it takes to serve a customer beyond the product cost — picking, packing, trucking, returns, paperwork, and getting paid. Our approach uses invoiced transactions and AR activity. We don’t pull on-hand inventory levels. If you’re looking for a metric that depends on inventory value, that’s outside our data set. We stick to what’s reliable, repeatable, and ready to use.

The Six CTS Metrics That Matter

The four workhorses (use these everywhere)

Average Line Items per Invoice — Lots of tiny lines = lots of touches. More steps, more time, more cost.

Average Line Dollars per Invoice — Bigger dollars per line help cover the handling. Pennies per line don’t.

Percent Return Lines — Returns and credits burn labor in the warehouse and the office.

Average Days to Pay (DSO) — Slow pay ties up cash and adds AR hassle. Price and terms should reflect that.

Two often overlooked (but they bite)

Rebate Cost — Program + special rebates can quietly eat the margin you thought you had.

Delivery Cost — Miles, drops, rushes, off-route stops — death by a thousand truck rolls.

Put together, these six metrics give you a clean, repeatable CTS picture — without relying on inventory values.

Why These Costs Get Overlooked

  • Silos: Sales, Ops, and Accounting each see part of the elephant. Nobody owns the whole animal.
  • Habit discounts: "They're big" turns into "they're cheap," forever.
  • Old tools: ERP rules drift. Behavior rarely connects to price.

    • Result: your best customers end up subsidizing high-effort, slow-pay, heavy-return accounts. Not great.

    Practical Scenario: "Eastern epaCUBE Distributors"

    This one will sound familiar.

    Setup

    Everyone swears Eastern epaCUBE Distributors (EED) is a "flagship." Big brand. Nice folks. Big revenue. They even ask you to "factor inventory value" into your metrics. We stick with what we trust: invoice-based CTS.

    What the data says

  • Avg Line Items/Invoice: 17 (segment median: ~6) — tons of split lines and tiny picks
  • Avg Line Dollars: $48 (segment median: ~$120) — too small to cover handling
  • Return Lines: 6.8% (segment median: ~1.9%) — credits galore
  • Avg Days to Pay: 58 days on Net 30 (segment median: ~33 days) — your cash, their loan
  • Rebate Cost: ~7.5% of revenue — looks great on paper, not so much in the bank
  • Delivery Cost: ~3.2 drops/week with rush and off-route stops — trucks aren't free

    • Pricing reality

    They're getting A-tier discounts because "strategic." Net in the returns, rebates, deliveries, and slow pay and — surprise — their real margin sits in the bottom third of your book. Big revenue, small payoff.

    CTS flips the script. EED isn't "flagship" — they're high-effort. And we didn't need inventory values to prove it; the invoices told the story.

    From Assumptions to Action with epaCUBE's Segment Optimizer

    1. Segment by behavior (not just revenue)

  • Value-Leader: high line dollars, low returns, pays on time
  • Balanced: middle of the road
  • High-Effort: many lines, low dollars, slow pay, frequent returns and deliveries

    • 2. Price with logic (guardrails and floors)

  • Value-Leader: reward the good behavior — loyalty pricing, aligned programs
  • Balanced: standard matrix with targeted offers
  • High-Effort: tighten discounts, add MOQs, consolidate deliveries, require ACH or prepaid if needed

    • 3. Operational levers that actually move the needle

  • Invoice cadence: bundle small orders to set ship days
  • Delivery policy: minimum drop size or fees for off-route rushes
  • Returns control: tighter RMA and product education
  • AR alignment: early-pay terms, reminders for the slowpokes
  • Rebate mix: steer toward lower-rebate equivalents where practical

    • Follow-through on EED (illustrative)

    Actions taken:

  • Reclassify to High-Effort — Managed
  • Consolidate orders; $250 minimum or service fee
  • Shift some SKUs to lower-rebate options
  • Offer 2% 10, Net 30 to pull Average Days to Pay down
  • Turn on discount guardrails to protect floors, automatically

    • 90-day example results: Avg Line Items/Invoice 17 → 9 | Avg Line Dollars $48 → $92 | Return Lines 6.8% → 2.4% | Avg Days to Pay 58 → 38 days | Deliveries/Week 3.2 → 1.4 | Net Margin +260 bps. No list price change required.

    Playbook: Turn CTS Insight into Profit

  • Measure what you can trust. Start with the six invoice-based metrics. Skip inventory value.
  • Segment for value, not volume. Put customers where they belong — Value-Leader, Balanced, High-Effort.
  • Tie price to behavior. Guardrails and floors that reflect Average Days to Pay, returns, deliveries, and rebates.
  • Fix root causes. Ship windows, order minimums, RMA policy, AR terms, SKU education.
  • Communicate like a pro. Fair, consistent, and clear. "We're protecting service for everyone."

    • What You Can Expect

  • Every +1% in realized price can boost profit by ~11% (pricing leverage is real).
  • CTS-based segmentation lifts margin without extra headcount and brings sanity to discounts.

    • Next Steps

  • CTS Quick Scan: Run the six metrics for your top 100 customers.
  • Segment and Simulate: Model guardrails and policy tweaks in epaCUBE.
  • Pilot: Try it with 10 high-effort accounts for 60–90 days.
  • Scale: Roll the proven rules across the book.
    • Get Started with epaCUBE