Analytical Frameworks: Analyzing Negative Margin Business Sometimes Shouldn’t Be As Easy As it Looks

Every customer we’ve worked with has had a process to deal with negative margin business. Unfortunately the process usually consists of producing a list of negative margin business at the customer/product level each month… and that’s about it. We’ve heard tales from customers who reacted to months of inaction by embarking on complete negative margin purges and in the end giving up volume that they actually needed to fill plants. Afraid of making the same mistake twice, customers then did nothing to fix negative margin business for months.

To help avoid this problem we feel that two additional pieces of information are vital to any negative margin analysis in addition to basic volume, price, COGS, and margin data – and they’re usually missing. First, companies need to determine or estimate the % of COGS that are fixed vs. variable, and then subtract fixed costs from margin to determine if the sale was contribution negative in addition to being margin negative – as companies will frequently tolerate negative margin business to absorb fixed costs. Cash negative business, however, should be the ultimate no-no barring extraordinary circumstances. Second, companies should determine the number of customers purchasing that product. Knowing that a customer is the only customer for a certain negative margin business can allow you to consider removing the product from your portfolio entirely.

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Having just one piece of this information missing (i.e. cash contribution status) gives resources an excuse not to review your data and ultimately not take any actions to improve your business. But by providing a complete picture of the situation you can present a clear case for action.

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