Cost evaluation

BY MATTHEW D. MOHR

Businesses have started to return to looking at their operating costs and what it takes to effectively market certain products to a particular market segment. The big powerful e-tailers are calling this the “cost to service” as if it is a new concept. Basic economics, finance and accounting have addressed the idea for a long time as marginal cost, gross profit and through cost accounting.

One of the reasons for this “new” theory, called cost to service, stems from the explosion in freight costs which caught the e-tailers by surprise and forced them to realize cheap prices with no value added was not a long-term winning game.

Foolish small enterprises tried to meet the price threat of e-tailers by cutting prices and discarding value added services, which often led to losses and business failure.

Cost to service is a reinvigoration of the old “A, B, C” customer ranking system which companies tried to use to figure out the best, most profitable and worst, most labor-intensive customers to service. The idea was to keep the best and get rid of the worst. ABC worked for some businesses and often became a disaster for those with low sophistication.

For quite a while, I have suggested big volume web-based sellers failed to recognize the costs of distribution and as a result were not sustainable longterm businesses. With the advent of cost to service analysis, they will become more profitable. The big sellers are extremely intelligent and can accurately pinpoint what they need to analyze effectively. Every item sold to every customer can be analyzed for profitability. The volume web-based sellers are smart enough to figure out what works and what is profitable. As a result, we will see a focused change in how business on the web is handled, creating opportunities and some new challenges.

The biggest challenge will probably come to the delivery services, which rely on web-based business packages. As the large e-commerce sellers demand volume concessions for package delivery services, the package delivery service will be forced to change or go out of business. A shift in cost is bound to occur since eventually someone has to pay for all services rendered. PB

Matthew D. Mohr CEO, Dacotah Paper Co. mmohr@dacotahpaper.com

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