What Causes the Decline in Gross Profit Margin?

Written by roger golden
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What Causes the Decline in Gross Profit Margin?
Maintaining a minimum gross profit margin is vital to business survival. (Jupiterimages/Photos.com/Getty Images)

A business owner must watch the profit margin of the company in order to achieve the primary goal of all businesses: growth. The consumer market is the largest factor, but others include the value of materials or the cost to maintain a business location or hire employees to handle the workload. If the gross profit margin is still falling, the problem could simply be underpricing the products or services.

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Market Decline

The market can decline for several reasons. The first is when popularity falls due to a fading fad or with seasonal changes in market demand. When the market becomes saturated with an assortment of similar items it causes companies devoted to those items to share in an overall decline. On a larger scale, the market suffers consumer shock when the economy falters due to a loss of buying power. When the market suffers a decline, gross profit potential is lost and companies operation tactic have to be altered in order to remain competitive.

Material Price Increase

Materials are affected by market fluctuations of their own, and when your material costs increase, the gross profits decline accordingly. Solutions for material cost increases include changing the material vendor of switching to different materials altogether, increasing the price of the product being produced, or make a smaller version of the product without changing the retail price. Product distribution should be calculated into the cost of the product at the manufacturing level, so that the final cost of the product shows a profit over the cost of materials plus the expense of getting the finished product to the consumer.

Cost Versus Price Alignment

Consumers are shopping for the product that performs a job at the lowest cost. The business management must take care that any products priced significantly above competitor prices offers additional value or appeal. A top brand will have a higher market value from the consumer perspective, even when both products are nearly identical in every way. Keeping the products or services priced to match the current market and brand reputation can boost gross business profits by having more appeal to frugal shoppers.

Operating Expenses

Paying for more warehouse space than the company needs for operation creates a drag on the profits of the company that may not be immediately apparent. Overheads include the cost of maintaining the workforce, providing the equipment to create products and such incidental costs as electricity and water, Internet access and the phone lines used to communicate with employees and customers alike. Repair and maintenance costs affect the gross profits as well, and can be mediated by assuming more of the tasks in-house rather than paying outside services or contractors. Use charts such as those offered by the University of Pennsylvania at Wharton, and create customised spreadsheets that help you track your business success.

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