Why blended margin misleads
A business at 42 percent blended margin may have lines running at 60 and lines running at 12. The average tells you nothing actionable, and sales effort tends to flow toward whatever is easiest to sell rather than whatever is most profitable.
Allocate the costs that vary with the product
- Direct materials and labour, which are usually straightforward.
- Freight in and out, which differs sharply by product weight and size.
- Payment processing, which varies with price point.
- Returns and warranty, which concentrate in particular lines.
- Storage, where slow-moving stock consumes space for longer.
Be careful with overhead
Spreading fixed overhead evenly across products makes low-volume lines look worse than they are. For decision-making, contribution margin after variable costs is usually the more useful figure, with overhead considered separately.
What it typically reveals
Most businesses that do this find a small number of products generating a disproportionate share of profit, and at least one line that loses money at volume. The second finding is the valuable one, because it is usually invisible without the split.
Acting on it
The options are repricing, reducing cost, or discontinuing. All three are easier to justify with the numbers attached, and all three are usually resisted without them.
TallyWise provides this as part of our fractional CFO services. Book a call to talk through your situation.
