Margin Pressure: What it Means, How it Works

What Is Margin Pressure?

Margin pressure is the risk of negative effects on a company’s profitability margins. Analysis focuses on the gross, operating, and net margin. Margin pressure can also be analyzed within contribution margins.

Understanding Margin Pressure

Margin is calculated to identify the profitability of a unit of sales when adjusting for costs. Gross, operating, and net margin are the main calculations. Margin looks at profitability in comparison to revenue.

Margin pressure results in decreased unit profitability per revenue.

Margin pressure is a risk that companies seek to mitigate or avoid.

It can be related to macroeconomic events such as changes in regulations. Margin pressure can also result from supply chain changes, production issues, labor problems, and more.

For example, the Japanese tsunami disrupted supply chains throughout Asia in 2011, squeezing profits for many manufacturing companies.

Identifying the Effects of Margin Pressure

Businesses experience margin pressure when production costs rise or price competition changes. Economic market cycle changes are often drivers of margin pressure. Increased tariffs and e-commerce competition can have significant effects on margins.

Companies focus on gross, operating, and net profit margins to analyze profitability and efficiency. Each margin calculation has unique margin pressures.

Gross Margin

Gross profit divided by revenue results in a gross margin that analyzes profit after accounting for direct costs. Margin pressure on gross margin can come from increased costs or decreased price per unit.

Changes in commodity prices often affect gross margins.

Operating Margin

Operating profit divided by revenue results in an operating profit margin that analyzes profit after accounting for direct and indirect costs. Margin pressure on the operating margin can come from rising operating costs.

Net Margin

Net profit divided by revenue results in a net profit margin that analyzes profit after accounting for costs, interest, and taxes. Rising interest payouts or higher taxes can cause net margin pressure.

Other Effects

Other effects of margin pressure include price decreases, new competition, increased regulation, internal production problems, and competitors copying intellectual property.

Companies manage margin pressure by closely monitoring changes and trends in their marketplace. Changes in costs or prices result in marginal changes per unit, which companies analyze and mitigate.

Key Takeaways

• Margin pressure is the risk of negative effects on a company’s profitability margins.
• Margin pressure is any cost or revenue change that could lower a margin calculation, resulting in lower profitability.
• Gross, operating, and net margin are important profitability margins that companies watch for margin pressure.