6 - Cost-to-Serve Analysis What Are Your Customers Really Costing You?
A series about business efficiency, finding profit and how to get there
Introduction
It’s a familiar story. A business wins a big client, celebrates, and pours its best resources into keeping them happy. The client is demanding, but hey, they bring in serious revenue.
Months go by, and something feels off. Margins shrink. Deadlines slip. Team morale drops. The reality sets in that “high-value” customer may actually be costing more than they contribute.
This is where cost-to-serve analysis becomes a game-changer.
It’s the practice of looking not just at what a customer pays you, but what it truly costs to serve them time, labour, materials, customisation, complexity, admin and more.
In a flat economy, where chasing new revenue is harder, optimising your existing client mix could be your most powerful lever for profitability. Because the gold isn't always in more clients. It’s in better-aligned ones.
Actions to Be Taken
Here’s how to start uncovering the real cost of serving each customer or segment
Segment Your Customers
Group your customers into meaningful categories -
By product/service
By industry
By size
By complexity or service model
Track Direct Service Inputs
Estimate or track the time, effort, and materials each segment consumes. Consider -
Hours of account management or customer service
Customisation or exceptions from standard offerings
Additional delivery, travel, or packaging requirements
Non-billable support or troubleshooting
Map Gross Margin by Customer or Segment
Use this formula -
(Revenue – Direct Costs) ÷ Revenue = Gross Margin %
Compare across segments. Often the “biggest” clients are not the most profitable.
Assess Soft Costs
Soft costs are harder to measure but still real -
Team stress or burnout
Impact on delivery to other customers
Scope creep and change requests
Frequent late payments
Use staff surveys or feedback tools to gather this insight, your team knows where the friction is.
Decide Fix, Reprice, or Fire
Once you’ve identified high-cost, low-margin customers, you have three options -
Fix – Improve efficiency or reset expectations
Reprice – Adjust pricing to reflect true cost-to-serve
Fire – Politely offboard if alignment is no longer viable
Psychological Perspective
Firing a client, or even renegotiating with one, can feel like failure, especially for SME owners who built the business on relationships. There’s often guilt, fear, or pride tied up in “being able to serve everyone.”
But here’s the truth. Not all revenue is healthy and holding onto unprofitable customers out of fear starves the business of focus, energy and room for better-fit opportunities.
Reframing your thinking helps you’re not rejecting people, you’re realigning the business to serve well, not just more.
Your energy is a finite resource. Spend it on relationships that create mutual value.
HR Best Practice
Your team feels the burden of high-maintenance, low-return clients. Here’s how HR can support -
Encourage anonymous feedback about customer pain points, it’s often more candid.
Include cost-to-serve discussions in quarterly reviews or strategy sessions.
Recognise when emotional labour is being spent disproportionately on certain accounts.
Involve staff in the fix phase. They often have creative ideas to streamline service.
Also, if clients are being let go or repriced, make sure your team is briefed and supported. These shifts can affect morale if not communicated with clarity and confidence.
Red Flags to Watch For and Mitigate Against
Be alert to these signs of inefficient customers -
Regular requests outside of scope with no additional fees
Frequent escalations or hand-holding beyond what’s standard
Accounts that pay late — despite reminders
Customised pricing or delivery that doesn't scale
Staff avoid working on certain accounts due to stress
These customers might be draining your profit, team wellbeing, and opportunity cost — all at once.
Narrative Story Meet Teuila from Hamilton
Teuila owns a successful corporate catering company in Hamilton. One of her biggest clients, a government department, brought in steady revenue but demanded highly custom menus, last-minute changes, strict dietary compliance and frequent complaints.
She decided to do a cost-to-serve analysis.
She discovered this client had -
The lowest profit margin of any account
Required twice the admin time as similar clients
Caused rework or stress nearly every week
After careful review, she gave the client a respectful ultimatum accept a price adjustment or move on. They declined. She let them go.
The result? Her team relaxed. Operations smoothed out and she replaced the revenue within three months, at twice the margin.
Teuila reflects - “They were loud, but they weren’t valuable. Letting them go gave us room to grow - the right way.”
Golden Nugget - “Not all revenue is worth it. Real profit lives where value and effort are in balance.”
If you’d like a confidential, free of charge, free of obligation conversation about your business, here’s how to get me.
📞 Phone +64 275 665 682
✉️ Email john.luxton@regenerationhq.co.nz
🌐 Contact Form www.regenerationhq.co.nz/contact
If you’d like to read more RegenerationHQ thinking on SME business and other things, go here – www.regenerationhq.co.nz/articlesoverview
🔹 RegenerationHQ Ltd - Business Problems Solved Sensibly.
Supporting NZ SME Owners to Exit Well, Lead Better and Build Business Value.