Margin Gains and Margin Leakages.

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The figure shows the structure of the Price and Margin Waterfall. The margin gains are at the price elements. The margin leakages are on the cost side of the waterfall. Below is a description of how controllers can use scenario analysis to understand the potential impact on margins.

Margin Gains

In this example, I address the potential margin gains related to discounts, promotions and rebates. Understanding these topics at the customer level helps to calculate specific actions to determine the potential impact on margin.

Some key ways to achieve margin gains are:

• Discounts: By analyzing scenarios, companies can determine at which customers and/or products which discounts are most effective in increasing sales without hurting margins. Consider determining the discount for a large customer or establishing a discount for a customer who orders frequently. Compare which discount strategy provides the best balance between increased sales volumes and margin retention.
• Promotions: Scenario analysis allows you to simulate the impact of different promotional strategies and choose the most profitable approach. For example, you can simulate the effectiveness of seasonal promotions versus ongoing promotions on customer segmentation and margin. This allows you to determine which promotion offers the highest ROI during the year.
• Rebates: Using scenario analysis also helps optimize front-end and back-end rebates by evaluating expected revenues and costs under different market conditions. This allows you to evaluate the impact of different rebate structures (e.g., cash rebates, volume-based rebates) on customer loyalty and profitability.

Margin Leakages

Margin leakages are the losses in profit margins that occur due to inefficiencies, unexpected costs and activities that can be applied more specifically. Scenario analysis can help identify and manage these leakages by simulating different future situations. Some key causes of margin leakages and how they can be prevented:

• Logistic Costs (LC): Scenario analysis helps optimize the supply chain by evaluating different logistics strategies and finding the most cost-effective solutions. Analyze the impact of different logistics models (e.g., just-in-time, bulk storage) on overall costs and delivery times. Determine which strategy optimizes margins.
• Customer Acquisition Cost (CAC): Scenarios can provide insight into how different marketing strategies affect customer acquisition costs, allowing companies to choose the most effective methods. Simulate the ROI of various marketing campaigns (e.g., digital marketing, traditional media) on the CAC and expected revenue growth. Determine which campaign offers the best balance between cost and customer acquisition.
• Cost to Serve (CTS): By simulating different scenarios, companies can identify the most cost-effective ways to serve customers without reducing service quality. Analyze the cost and service impact of different serving models (e.g., self-service portals, personal account managers) and determine which works best for different customer segments.

Conclusion

Optimizing margins requires a holistic approach in which both the opportunities for margin gains and the causes of margin leakages are carefully analyzed and managed. Because of the relationship between the various components, a detailed analysis combined with the impact on the overall margin is desirable. Indeed, once you start simulating different scenarios, you want to be able to assess the impact of specific (improvement) actions on the total.

Want to learn more about this type of analysis and what it takes to do it? Contact us for a free consultation and find out what steps you can take to improve margins as well.

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