Same tariff, very different cost to serve.
Two service points on the same tariff look identical on the bill and cost very different amounts to serve. The network capacity they drive at peak, the asset they sit behind, the field visits they trigger, the support they call on and the way they are metered all vary, and a flat allocation, or worse a regulated allowance, averages every one of those differences away. The real cost-to-serve is a separate number from what the regulator lets you recover, and only the real one should guide a segment, tariff or asset decision.
Cost and Profitability Consulting · 150+ models since 2010 · TDABC
Cost-to-serve in utilities is driven by network and asset capacity, field visits, support, metering and connection type, not by the tariff and not by the regulated allowance. In the models we build it varies two to three times between customers who look identical, and traditional costing spreads overhead by volume, so complex, low-volume work comes out cheaper than it is. TDABC assigns capacity and activity to each customer, segment, service point and asset, producing the real cost-to-serve, which is kept explicitly separate from the regulated allowed cost. We apply transversal evidence and the method, not an invented utilities benchmark.
Two numbers, one truth.
The most important distinction in utility costing is the one the industry most often blurs. The regulated allowance is a recovery ceiling, negotiated and averaged; the real cost-to-serve is what it actually costs to serve a given customer or run a given asset. They are produced by different processes for different purposes, and they routinely disagree. A segment that the allowance treats as average can be expensive to serve in reality, and an asset the allowance rewards can be cheap to run. Make a tariff, segment or investment decision on the allowance and you are deciding on a number that was never meant to measure cost. TDABC produces the real one, and keeps it separate.
Capacity, weighted to peak
The network and asset base are sized for peak and load, so the real cost follows the capacity a customer or asset drives, not its average throughput.
Field and support intensity
Visits, connections, faults and support contacts are time on expensive crews and control rooms. A high-touch service point costs far more than a quiet one on the same tariff.
Metering and connection type
How a point is metered, read and billed, and what it is connected to, all change the cost. The tariff charges them the same; the activity does not.
Idle capacity is a real cost
Practical capacity is 80 to 85 percent of theoretical, and few organisations measure the cost of the unused slice. It belongs to the decision, not buried in every unit served.
The same peak-driven capacity math applies in telecom, where network cost follows the peak a subscriber drives, not the plan they are billed. And the gap between an external fixed price and the real cost beneath it is the same one healthcare faces between a fixed reimbursement code and what a case actually consumes.
REGULATED ALLOWANCE IS NOT REAL COST
Illustrative structure, not a sector benchmark. The same regulated allowance can sit above or below the real cost-to-serve, depending on the segment. Only the real cost guides the decision.
Cost follows the service point, activity by activity.
The service point's real cost is built from what it consumes: a peak and load-weighted share of network capacity, a share of the asset cost behind it, the field-crew time it triggers, the support contacts it makes, its metering and billing effort, and a share of infrastructure overhead by activity. Multiply by the capacity cost rate of each resource and the real cost lands on the customer or asset that drove it.
Cost to serve a service point = network capacity share (peak / load-weighted) + asset cost share (asset class x capacity cost rate) + field visits x crew time x crew rate + support contacts x minutes x contact-centre rate + metering, reading and billing effort + share of infrastructure overhead by activity consumed
Illustrative structure, not a measured benchmark. This is the real cost-to-serve, separate from the regulated allowance.
Decisions on the truth, not the allowance.
Once each segment and asset carries its real cost-to-serve, the decisions that a regulated average could never support become possible: which segments are genuinely expensive to serve and why, which assets cost more to run than they return, where field and support effort concentrates, and how a tariff or investment compares to the actual cost rather than the allowed one. The transversal whale curve, drawn on the real cost, shows where the economics truly sit, kept deliberately separate from the regulated picture so the two are never confused.
Frequently asked questions
- What is cost-to-serve in utilities?
- The real cost of serving a customer or service point: network and asset capacity, field visits, support contacts, metering and billing, before revenue and separate from the regulated allowance. Industry analysis shows it varies two to three times between customers on the same tariff.
- Why is regulated cost not the right basis for decisions?
- The regulated allowance is what you may recover, not what it costs. Segment, tariff and asset decisions need the real cost-to-serve, which TDABC measures and which can diverge sharply from the allowance.
- How is network and asset cost allocated fairly?
- By the capacity and activity each customer or asset actually drives, weighted to peak and load, not by average volume or headcount. The idle slice of capacity is a real cost the convention puts at 15 to 20 percent of theoretical, rarely measured.
Find the real cost the allowance never measured.
The Profit Check needs no data upload. It points to where your real cost-to-serve and your regulated view are most likely out of line, and what knowing the difference is worth.
- Duration
- 12 to 15 minutes
- You receive
- Score, 7 dimensions, sector benchmark
- Price
- Free, no email needed
Proof
A distributor in New Zealand. €1.335M of cost-to-serve made visible, then halved, and 830 loss-making customers brought down to 295.
Read the case study →Who you would be talking to
Miguel Guimarães, Founding Partner
Cost and profitability practitioner for 25+ years. Presented the Damco cost-to-serve case at Managing for Profit (Amsterdam RAI, December 2009), on the same programme as Robert S. Kaplan.
Call +351 910 313 731
Workshops20-21 Oct · Online, ZoomReserve a seat
Reviewed by
Miguel Guimarães
Founding Partner, Cost and Profitability Consulting
More than 150 Time-Driven ABC engagements across 11 sectors since 2010, working within the Kaplan and Anderson framework.
About the author →Published
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- 1Time-driven activity-based costing: ABC made simple and scalable
- 2Cost-to-Serve Analysis
- 3The Whale Curve
- 4TDABC vs ABC
- 5Make-or-Buy and Relevant Costs
- 6Cost-Volume-Profit (CVP) and Break-Even Analysis
- 7Customer Profitability Analysis
- 8Methods & Frameworks: how we cost, defensibly
- 9TDABC for Financial Services
- 10How to calculate cost to serve, step by step