Margin doesn't usually collapse in a quarter. It drifts — half a percentage point at a time — until one day the board asks why a record revenue year produced a mediocre bottom line. By then the damage is twelve months old and the culprits have long since moved on.
What drift actually looks like
On a chart, margin drift is the gentlest possible slope: gross margin slides from 42% to 41% to 39.5%. Each month is a rounding error. The trend is a year-end disaster.
The four usual suspects
1. Discounts that quietly become standard
A 5% discount approved as a one-off for a strategic deal becomes the price the rep quotes by default. Six months later, your list price is fiction.
2. Mix shift toward lower-margin lines
Total revenue rises because the team is selling the easy stuff. The easy stuff has thinner margins. Aggregate margin slides without anyone choosing it.
3. Supplier cost creep
Suppliers nudge prices 2–3% a year. You absorb it because re-pricing customers feels harder than absorbing it. Compound that across three suppliers and two years.
4. Unallocated service costs
Customer success, returns, technical support — costs that sit in 'overhead' but are caused by specific products or customers. If you don't allocate them, you can't see them.
A monthly review that catches it
- Report gross margin by product line AND by top-20 customers, every month.
- Track average discount rate by rep, by month. Flag anything trending up.
- Pull supplier price changes into a single log. Review quarterly.
- Allocate service costs to the product or customer that caused them.
Margin reviews aren't a witch hunt. They're how you find the small fires before they merge into one big one.
Make ownership stick
Every margin line needs a named owner — not 'finance', not 'the commercial team'. One person who owns the trend, presents the variance, and proposes the fix. Without ownership, the review becomes a ritual and the drift continues.
