---
title: Margin Analysis
summary: Why your blended margin hides the truth, and how to measure profit by product, service, and client.
est_minutes: 6
sort: 5
---

There is a number most business owners know without hesitation.

Their revenue.

There is a number most business owners cannot tell you with confidence.

Their actual margin by product, by service, or by client.

This gap is where profit quietly disappears.

You may know your overall gross margin from the P&L work in Module 01.

But the overall margin is an average. And averages hide the truth.

Your overall margin might be 52%. But inside that average, one service line is running at 71% and another is running at 28%. The profitable one is subsidizing the unprofitable one, and you would have no idea unless you ran the analysis.

That analysis is this module.

**Why Overall Margin Misleads**

The overall gross margin on your P&L is calculated by dividing all your gross profit by all your revenue. It tells you the aggregate efficiency of the business.

What it does not tell you is which parts of the business are producing that efficiency and which parts are dragging it down.

Consider a business with three service offerings. One is consulting at $300 per hour with $60 in direct delivery costs. One is a recurring support retainer at a fixed monthly fee with high delivery hours. One is a workshop that generates good revenue but requires expensive venue rental and preparation time.

Each one has a completely different margin profile. The P&L shows you one blended number. Margin analysis shows you three separate ones.

The decisions that follow from those three separate numbers are very different from the decisions you make looking only at the blended average.

Revenue is vanity. Margin is sanity. And the only way to act on margin is to know where it is and where it is not.

**The Three Margin Measures**

Margin analysis uses three measures. Each one answers a different question about profitability.

Measure one: Gross Margin by Product or Service.

Gross Margin by Offering = (Revenue from the offering - direct costs to deliver it) / Revenue.

This is your production efficiency measure by offering. It tells you which products or services are structurally profitable at the point of delivery and which are not.

A service or product with a gross margin below your business-wide gross margin target is pulling your overall margin down. That does not automatically mean it should be eliminated. But it does mean it should be priced higher, delivered more efficiently, or positioned as a loss leader with a documented strategic reason for carrying it.

Measure two: Contribution Margin.

Contribution Margin = Revenue - all variable costs associated with producing that revenue.

Unlike gross margin, contribution margin strips out the direct costs and the variable overhead that scales with the offering. What remains is the contribution each product or service makes to covering fixed overhead and generating net profit.

This measure answers a different question: if I drop this offering, how much does my capacity to cover fixed costs change? A product with a low gross margin can have a high contribution margin if its variable overhead is minimal. Contribution margin tells you whether removing an offering actually improves profitability or just reduces revenue.

Measure three: Client-Level Margin.

Client-Level Margin = (Revenue from a specific client - all direct and variable costs associated with serving that client) / Revenue.

This is the measure most operators have never run and where most are most surprised.

Some clients generate more revenue and less profit than others. A high-revenue client who requires constant scope changes, frequent emergency support, and extended payment terms may be generating half the margin of a smaller client who is straightforward to serve, pays on time, and renews without negotiation.

Knowing your margin by client changes who you prioritize retaining, who you fire, and who you build your sales process to attract.

**What To Do With The Analysis**

Once you have completed the margin analysis across products, services, and clients, you have four decisions in front of you for any underperforming offering or client.

Reprice.

If the offering is undermarked because pricing has not kept pace with delivery costs or market rates, a pricing adjustment may close the gap without changing anything about the offering itself. This is the first thing to evaluate before restructuring or eliminating anything.

Re-engineer delivery.

If pricing is correct but delivery costs are too high, the delivery model needs to change. Reduce time spent per engagement, replace high-cost delivery components with lower-cost alternatives, or systematize parts of the delivery that are currently handled manually.

Reposition.

Some offerings are low-margin by design because they serve as an entry point to higher-margin work. If that positioning is intentional and working, the low margin is acceptable. If it is accidental and the upgrade path is not converting, the loss is not justified.

Remove.

If repricing, re-engineering, and repositioning have all been evaluated and the offering still does not carry its weight, the most profitable decision is to stop offering it. Eliminating a low-margin offering that consumes significant delivery capacity often increases both margin and capacity simultaneously.

**Your Action Step**

Your worksheet for this module is the Margin Analysis Calculator.

It walks you through calculating gross margin and contribution margin by product or service, then client-level margin for your top clients by revenue. The calculator produces a ranked view of your offerings and clients from highest to lowest margin so the decisions about what to grow, what to fix, and what to remove are based on numbers rather than instinct.

Run the analysis. Then we plan the capital.
