Four tips: How to succeed with the margin

Profitability is often based on receiving an attractive input price - and pressuring your suppliers has always been a safe bet. But with more complex business models and more data, the purchase itself has only become part of the margin and only the beginning of profitability, writes Martin Granberg at Priceindx.

As everyone knows, cost and profitability have been highly topical for a while now. We have seen a number of bankruptcies in various industries. I have previously written that it is when things are going well that you have room to work on your weaknesses, however this rarely happens and therefore everything is put to the test when things go badly again and business models are challenged.

What I have noticed over the last two years, when reading and following the discussions, is that a complex marginal thinking and a profitability perspective rarely make it all the way. Neither all the way up nor all the way out in the sales ranks in an organization.

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When calculating profitability, one looks, among other things, at the contribution margin (TB) at different levels, for example TB1 and TB2. This is done throughout the business where overhead burdens profitability.

So far, basically all companies work, apart from the very smallest. But when you work with profitability, you need to transfer this concept down to the product level as well. The straight margin on a product is easy to work out, but what is the cost of goods sold (COGS), and what do you, as a company, factor into this concept?

Traditionally, "cost of goods sold" is primarily purchasing and logistics costs. In an e-commerce or "omnichannel setting" it becomes something else. This is because each unique product has different peripheral costs in the form of shipping (size/weight) but also marketing costs, return rate, etc., which can differentiate between both product groups, the individual items and sales channel.

"To measure your progress, you should measure it in marginal kroner. This is often very intuitive when you talk about it, but numbers still tend to be measured in percentages”

But it is only when you have structure and an overview of costs for your range that you can start working with the entire product portfolio, and there by working with "swings and merry-go-rounds" based on KVIs and entire receipt values. It is only then that you can talk about optimizing the profitability of the entire business.

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To measure one's progress, one should measure it in marginal kroner. This is often very intuitive when talking about it, but numbers still tend to be measured in percentages. With percentages, it is always easy to have a high margin, with the risk of getting a large part of a very small pie. These are often just crumbs of what you could have won if you do "right", which has its basis in structure and overview to make the right decision.

To make it concrete - these are not the four fastest methods, but they are the ones that have the opportunity to create the greatest effect:

1. Work for good input prices, preferably with the support of a data-driven purchase, where the market data can be visualized for the supplier. This makes it clearer and also easier to demonstrate that a high purchase price does not make the product (or the seller) relevant on the market if the target margin is to be maintained.
2. Create opportunities to differentiate the COGS at the product level. Alternatively - if you don't have the tools or technology to break this down granularly - you can work with different standard costs, this to get as fair a picture of reality as possible.
3. To, through structure and overview, create the conditions to work with the entire range in collaboration to optimize profitability in the store.
4. To measure change and then to measure correctly. For example, don't just look at the margin percentage, but also look at the margin crowns and the bottom line.

Martin Granberg,
Chief strategy officer & head of product, Priceindx AB