Margin Analysis, also referred as Contribution Analysis, is a tabular data to track the prices, variable costs and profit margins for all the members in a value chain (producer, distributor, retailer) for every relevant product within the firm’s product line and across competitors. This data is mainly used to understand the below:
- Which among the N products is the most profitable?
- What is the relative power of various channel partners or partners in the value chain?
- Are we leaving money on the table?
Definitions for the components of a margin analyses are:
- Retail Price or End-User Price is the price paid by the end-user to the channel member from which the product is purchased.
- Wholesale Price or Manufacturer’s Unit Price is the price paid to the firm.
- Channel Margin is the difference between the Retail Price that the reseller gets from the end-user and the Wholesale Price that it pays to the manufacturer.
- Unit Variable Cost is the sum of all variable costs incurred by the firm that can be directly assigned to the product on a per unit basis.
- Unit Contribution is the difference between the Unit Price and the Unit Variable Cost. It is also called Unit Margin or Unit Profit Margin.
One can also look at the annual contribution by each product and how much it costs the customer annually, if needed for decisions.