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IACS-7: the cost of customer friction, in figures finance can check
Revenue has an accounting standard. Cost has one. The cost of friction in the customer relationship has none, so a board rarely sees it and nobody signs for it. IACS-7 sets one out. It measures what friction costs in each part of the customer book, values the book after that cost, and reports both to the board, with a definition and an accountable owner for every line.
At a glance
The Standard
- Published in
- Volume IV
- It counts
- Five costs
- Per customer
- Five numbers
- Diagnostic
- One grid
- Opinions issued
- None yet
Five costs, already in your systems
Every organization records these somewhere. The method joins them for one journey, and every line is a volume multiplied by a rate, with the parts of the rate shown.
Five numbers describe any customer
They put the cost of serving a customer and the margin they bring on the same row. Two of them make the decisions: the tier governs investment, and the alert state governs retention.
Four accounts, worked in full
Ranked by revenue, the order is A, D, B, C. Ranked by what each account is worth, it is A, B, D, C. In the ten-account version in Volume I, the two rankings differ even more.
Constructed teaching data, every input published. Rates: a service hour at $22, an engineering hour at $48, $18 of recovery cost per payment failure. The ten-account version is Chapter 13 of Volume I. These four accounts are not the customers A to E preloaded in the Friction Worksheet, which come from Volume IV.
The inputs
| Account | Revenue a year | Gross margin | Support hours | Payment failures | Engineering hours | Expected tenure |
|---|---|---|---|---|---|---|
| Account A | $96,000 | 68% | 480 | 30 | 40 | 40 months |
| Account B | $24,000 | 60% | 260 | 25 | 30 | 20 months |
| Account C | $12,000 | 55% | 480 | 14 | 25 | 10 months |
| Account D | $30,000 | 58% | 480 | 10 | 45 | 12 months |
The five numbers
| Account | Pays a year | Burden a year | APR | Tier | C‑BEP, months | Tenure ratio | Alert |
|---|---|---|---|---|---|---|---|
| Account A | $96,000 | $13,020 | 5.01 | Tier-1 | 2.4 | 16.7 | GREEN |
| Account B | $24,000 | $7,610 | 1.89 | Tier-2 | 6.3 | 3.2 | GREEN |
| Account C | $12,000 | $12,012 | 0.55 | Tier-4 | 21.8 | 0.46 | RED |
| Account D | $30,000 | $12,900 | 1.35 | Tier-3 | 8.9 | 1.35 | GREY |
Account C costs as much to serve as it pays, with the same support hours as Account A on an eighth of the revenue. Account D clears its break-even point, but with an APR below 1.5 it is GREY, not GREEN.
The one-line audit test. Friction-adjusted lifetime value, divided by the product of nominal lifetime value and survival, must equal one minus one over the APR. If a spreadsheet or a vendor's system cannot reproduce that, it is not computing the method.
The Financial Control Grid
The grid plots monthly gross margin against friction intensity and splits both at the median of the book. It is a diagnostic, a picture a management team can argue with. It is not the decision: a median moves when the book moves, so the tier and the alert state decide.
Silent Killers
Low margin, high friction Strategy: ExitWhat the Standard contains
Published in full as The Friction Economics Standard, Volume IV.
- A register that defines every term, so a number means the same thing in every organization that uses it.
- The burden and its pillars, the Adjusted Profitability Ratio and its alert states, friction-adjusted lifetime value and the Capital Integrity Index, the entity-level figure.
- Governance and disclosure: board and audit committee accountabilities, and a short disclosure block reconciled to the ledger.
- Conformance and assurance: how an assessment would be carried out and reported.
- A regulatory floor that no number may override. A RED customer is a decision for a named person with a documented reason, never an automatic action.
- Twelve industries worked in the same nine sections, and a closing chapter that states the limits of the Standard and what data would refute it.
Status. No conformance opinion has been issued under IACS-7, no firm is accredited to issue one, and no one yet holds its credential. The method has not been peer reviewed. What exists today