Margins can often be made up of revenue streams from across various different sources and determined by a handful of different factors.
Consequently, it can be all but impossible to know at a glance exactly what’s driving increases or decreases in your profits. This is where a margin impact analysis, also called margin bridge analysis, comes in.
Put simply, a margin impact analysis helps you to look at each of these variables and assess which areas are bringing in the most profit. With this information, it becomes exponentially easier to decide where to focus your time, money, and resources. Here we take a closer look at how to conduct a useful analysis.
Margin impact can be identified by comparing current profit margin to a future state after making a change.
A simplified example could be as follows. If a business decides to change price volume mix, they would first need to calculate the new total costs. From here, subtract this from the current selling price to find the new percentage of profits after the increase (or decrease) in costs. The difference between this and the current profit indicates the margin impact.
Margin Impact Analysis Best Practice: Recognize & Isolate Variables
As stated above, margins are determined by a mix of factors. These range from your prices and products to the location they are sold in. During margin analysis, it’s crucial to isolate each factor – and this is done by keeping the remaining factor the same. For instance, changing the price of the same products sold in the same area lets you identify how much of an impact price and volume has.
What are the variables you should understand in depth?
Price & Sales Volume
There is no guarantee that selling a higher volume of product will lead to more profit. Once the cost of goods sold is covered, selling more doesn’t typically lead to an increase in sales dollars left over. Selling more products above cost, however, is one of the most straightforward ways to increase margins. Understanding the impact of this price increase comes down to gross profits; by analyzing gross margins quarter over quarter, it’s easier to see how much additional profit has been earned off the back of a price increase.
Depending on the size of your company, you might have outlets in different locations. Each location might have a target audience with different needs and different buying behavior, and different sales methods to adapt to different behaviors and other variables. A margin impact analysis will help you identify how your locations are performing, and which other variables can affect the performance of each location. It will also help you identify which of the locations has the best sales methods that might also be effective in your other locations.
Sales Channel Mix
Any business is likely to have different sales channels that a margin analysis should consider. Even a boutique store might make sales from footfall and online orders. The same store might also attend events and even have a market stall to sell their goods. Regardless, each sales channel is likely to have different costs and other factors that will have an effect on your overall profits.
Each channel is likely to have various impacts on your overall profit other than the margin each product is sold at. For example, the cost of renting a market stall might reduce margins, but it could also improve awareness of your products and brand, helping to increase profits overall. With a margin impact analysis, you will get a better understanding of how each channel affects your business.
Some products will have higher or lower margins than others. Some that have low margins can still be the most profitable product for a company if they’re sold in high numbers, while some of those with the highest margins will have a relatively small impact on overall profits. A margin impact analysis will help you understand how different product mixes will affect your overall profits. It can also give you valuable information that will help you formulate promotions involving different products to help you maximize profits.