Use this diagnostic when the profit layer moved
Margin compression starts with a business outcome: contribution, gross profit or operating profit is lower than a comparable baseline. The task is to explain that outcome across both revenue-side and cost-side effects. If the concern instead starts with many small input-cost changes before the margin result is known, use the cost-creep exception workflow.
| Evidence set | Question it can answer | What it cannot prove alone |
|---|---|---|
| Invoices and realised prices | Did realised price change on matched sales? | Why customers or staff behaved differently |
| Product, customer and channel mix | Did a different sales composition move the profit layer? | Whether the new mix will persist |
| Unit-cost, waste and fee records | Which cost-side effects reconcile the remaining change? | Operational causation without supporting records |
| Allocation policy and operating expenses | Did the named profit layer or basis change? | An underlying unit-economics problem |
Build a comparable margin bridge
Prerequisites, sequence and checkpoints
- Freeze baseline and current periods with the same product, channel, currency and tax scope. (not complete)
- Select contribution, gross or operating margin and do not switch layers mid-bridge. (not complete)
- Quantify price/mix, quantity, unit-cost, waste/returns, fee and allocation effects. (not complete)
- Reconcile the driver sum to the total change and show rounding or unexplained residuals. (not complete)
- Inspect records behind the largest supported driver before assigning action and owner. (not complete)
Separate evidence by margin driver
| Driver | Evidence to compare | Possible next check |
|---|---|---|
| Price and mix | Matched price and sales-mix records | Price or mix scenario |
| Unit cost and waste | Matched purchase, usage and return records | Supplier or process check |
| Fees and allocation | Channel statements and stated allocation basis | Fee-stack or overhead review |
Reconcile a fictional compression bridge
Reproducible user scenario
One monthly, tax-excluded CU example; signed drivers must sum to the total change.
| Step | Input or arithmetic | Decision meaning |
|---|---|---|
| Total margin change | Baseline 24,000 CU; current 19,500 CU; change -4,500 CU | Bridge target |
| Supported drivers | Price/mix -1,200; unit cost -1,800; waste -600; fees -700 | Subtotal -4,300 CU |
| Residual | -4,500 - (-4,300) = -200 CU | Keep visible as rounding or unexplained evidence gap |
Turn the bridge into a profit-layer decision
The useful output is a reconciled bridge from the baseline margin amount to the current amount, with a named profit layer and a confidence label for every driver. It is not an alert list of invoices. In the example, the 1,800 CU unit-cost effect is the largest supported row, but the price/mix effect of 1,200 CU still needs a commercial owner; combining them into “costs went up” would hide the pricing decision.
Choose the next owner from the bridge
- Price or mix effect: review realised prices, discounting and the sales mix before changing list price. (not complete)
- Unit-cost effect: isolate changed purchase rates from usage quantity before negotiating or redesigning. (not complete)
- Waste, return or fee effect: inspect the operational event or channel statement that created the row. (not complete)
- Allocation effect: preserve the unallocated contribution view and review the basis separately. (not complete)
- Residual: leave it unassigned until records reconcile; do not distribute it proportionally to make the bridge look complete. (not complete)
Limitations, evidence and next action
Use the calculation owner for the next step
- Gross to Operating Profit Bridge
Identify which operating-cost layer changes profit after gross profit
- Product Profitability Diagnostic
Diagnose product profitability by cost layer
Questions and boundaries
- Does the largest bridge row identify the cause?
- No. It identifies where to inspect records and operational evidence next.
- Can gross and operating margin be mixed?
- No. Reconcile one named layer first, then build a separate bridge for another layer.
Sources and scope
- Choose a pricing strategy — business.gov.au: Stable pricing decision concepts only; no Australian rule or value is treated as global.
- Basic cost behaviour patterns — OpenStax: Supports fixed, variable and mixed-cost concepts within a stated activity range.