Do you know if sales and discounts have reduced your profit margin? Or has it raised costs? Margin compression and margin leakage both reduce profit margin but have different causes. If your profit margin looks bleak or if you have no idea what your profit margin is, then you’ve come to the right place. We’ll be covering what margin leakage and margin compression are, how to fix it, and how to prevent it from happening again.
What is Margin Compression and Margin Leakage?
Both reduce margins, yes, but they are quite different. Looking in the dictionary, compress means to flatten by pressure while a leak is letting something escape. Thus, margin compression is shrinking the profit margin bandwidth whereas margin leakage is letting money fall through the crack. Margin pressure is applied when rapidly rising costs are not portrayed in the sales price of the product or service (suggesting the company takes a hit), a new competitor enters the market, or other costs or market factors happen. Margin leakage transpires when incentives, discounts, or promotions chip away the profit margin. Though margin compression and margin leakage have their differences, they can be fixed and avoided by two actions: visibility and agility.
But First, Where is the Leak or Pressure Coming From?
As you read, margin reduction has many causes. So, how can you find the source? A price and profitability waterfall can help you spot your weakest points, most expensive sources, and prime opportunities to cover margin leakage and compression. Price and profitability waterfall is a method used to conceptualize and visualize where revenue and margin are being gained or lost for any product, customer, or transaction. It presents a comparison between your company’s net revenue and its expenditures over a given period of time. You’ll be able to see a total cash flow bar that represents the bottom line for your business.
Found What Hurts. Now, How Do You Fix It?
It’ll take agility, visibility, and Rockton Pricing Management. That’s a secret since 88.4% of pricing professionals had “slow responses to changes in cost, competition, and demand”, 90.3% had “poor visibility into true profit drivers by customer and product,” and 92.3% said that “price realization varied widely across their sales team,” according to a recent study performed by Pricefx.
Stay Agile
Structuring your prices or contracts in a way that you can adjust them easily can fix slow responses to price changes. Rockton Pricing Management (nicknamed RPM) can help you become more agile with your pricing by allowing you to copy an existing price sheet, change a few prices, and upload it back into RPM where it automatically communicates the adjusted price to Acumatica. This can help you stay on top of price changes when risen costs and increased competition squeeze your profit margin.
Gain Insight
Discounts, sales, commissions, fees, rebates, and other compensations drive customers to buy but may hurt your profit margin. How can you tell? Rockton’s pricing solution gives visibility into just how much compensations are affecting your margin. RPM shows you how the calculated price came to be, all the
discounts, fees, promotions, etc. applied, and if they affect your margin with a simple yes or no. RPM knows these because you’ll set up volume pricing, special pricing, or one-day sales for an item, a customer, or a date. Then, RPM will take in account those price sheets and give you a recalculation of the price automatically. It will even send the adjusted price downstream into your transactional systems like Acumatica and digital commerce platforms – no extra step. Plus, if you’re curious to how RPM calculated that price, it gives you all the formulas. With that said, visibility using RPM can help you see which profit drivers reduce margin leakage and margin compression.
Quote More Accurately
Visibility can also help your sales team. Showing your sales team all profit reducers at a glance can help prevent them from digging too deep into your profit pocket. This can help your sales team give a more accurate quote to your potential customer. With RPM, we can do one better – review what if pricing scenarios. Therefore, your sales team can see if the quote causes margin leakage or compression while giving a more accurate quote.
How to Prevent Margin Leakage and Compression from Happening Again?
Seeing your margins and profit reducers will help you move prices dynamically which will result in no more margin leakage and margin compression. How you gain visibility and agility is up to you. Rockton Pricing Management is a viable solution (yes, it seamlessly connects to Acumatica) to help you be more agile with price adjustments, see how compensations affect the bottom line, and give your sales team a better vantage point. If you’re interested in seeing how Rockton Pricing Management can help you improve your profit margins, then we encourage you to book a one-on-one demo.
