Cost-to-Serve vs Gross Margin
Why gross margin lies about which customers make money - and how cost-to-serve completes the picture. With a worked example.
Cost-to-serve vs gross margin: the difference that decides profit
Gross margin is the number everyone trusts and the one that misleads most often. It is honest about the product and silent about the customer. Two accounts can carry the same gross margin and end the year far apart, because one is cheap to serve and the other is a constant stream of small orders, rush requests, returns and support calls. The difference between them is cost-to-serve, and it is where profit is actually won or lost. If you want the number itself, the cost-to-serve calculation takes five steps and data you already have.
So the two numbers answer different questions. Gross margin asks: is the product priced above its cost? Cost-to-serve asks: is the relationship worth having? You need both, and you rank customers on the second, not the first. Cost-to-serve is what bends the cumulative-profit line into the whale curve - the picture gross margin can never draw.
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