Cost-to-serve in 60 minutes: ranking customers by real profit

Two customers can carry the same gross margin and leave you with very different profit. Gross margin stops at the product. It does not include the cost of taking the order, picking it, packing it, delivering it and waiting to be paid. When costs are rising, that gap matters more, because small and awkward orders have less margin to absorb it.

The pressure is real

The Office for National Statistics reports that UK producer input prices rose by 8.3% in the year to September 2026, while output (factory gate) prices rose by 4.6%, the largest rise since April 2023. Costs are rising faster than the prices manufacturers charge. If your own prices lag your costs in the same way, every order earns a little less than it did a year ago, and the orders that were marginal last year may now lose money.

A one-hour exercise

You do not need a new system. You need a spreadsheet, last quarter's invoices and an hour.

1. Pick two lists. Your 10 smallest orders and your 10 most demanding customers: the ones with the most orders, queries, urgent requests or returns.
2. Estimate the cost of each order. Add the time to handle it, the time to pick and pack it, and the delivery cost per drop. Use rough minutes multiplied by an hourly cost. A reasonable estimate is better than waiting for a perfect one.
3. Add the cost of waiting. Multiply the invoice value by the days to pay, divide by 365 and apply your cost of money.
4. Compare with gross profit. Subtract the cost-to-serve from the gross profit on each line. Rank the results.
5. Choose one change and a review date. Not four. One.

Here is an illustration, with invented figures. An order of £180 at a 28% gross margin earns £50.40. If handling, picking and packing cost £35 and the delivery drop costs £25, the order loses £9.60 before credit is counted. Repeat that 100 times a year and £960 disappears without appearing on any report.

Why the cost of waiting belongs in the sum

GOV.UK states that the statutory interest a business can charge on a late commercial payment is 8% plus the Bank of England base rate, unless the contract sets another rate. The Bank of England currently shows Bank Rate at 3.75%, with its next decision due on 5 November 2026. On those figures, the statutory rate is 11.75% a year. This is a reference point for what the law treats as a fair price of delay, not advice for any particular customer. It does show that the time a customer takes to pay has a price, and that your price list may not include it.

The principle behind the exercise is simple: costs should follow the activity that causes them, so that the customer who causes the work sees it in the numbers.

Tips and tricks for this week

• Set a minimum order value at the level where an average order covers its own handling cost with margin to spare.
• Use a no-charge delivery threshold instead of a blanket policy, so larger orders keep the benefit.
• Fix delivery days by area and put a stated premium on urgent drops.
• Price payment terms. Treat each extra credit day as a priced item, not a default.
• Change one thing at a time, write down the date, and look at the same 20 orders again after 90 days.

If you would like a structured view of where margin leaks across customers and products, the Business Health Check covers it.