Profitability
Gross margin fell. Here is how to know why
The problem
Owners see gross margin drop two points and hear four different explanations from four different people. Nobody can prove which one is right.
Why it matters
Two points of gross margin on $5M is $100,000. If the cause is price, the fix is a conversation. If it is cost, the fix is procurement. If it is mix, the fix is sales strategy. The wrong diagnosis wastes a quarter.
How to know if you have this
- Margin explanations differ by department
- Material and labor cost changes are not tracked against price changes
- Mix shifts are noticed only after the fact
- Standard costs have not been updated in over a year
How Advisory Motion solves it
- 01Decompose the margin change into price, cost, volume and mix with dollar values
- 02Update standard costs so the baseline is real
- 03Identify the specific products, jobs or services driving the change
- 04Attach the required corrective action to each component
Illustrative example
1.8 points, three causes
For a manufacturer, 60% of the margin drop was input cost, 30% was mix toward a lower-margin line, and 10% was scrap. The fix was a price adjustment on one product family and a yield project — not the across-the-board increase that had been proposed.
Illustrative composite · not a client identification
Where this connects