As we evaluate a P&L, we often get a big picture top-down view of gross margin for the entire business. As an example, the business is chugging along at 40% margin; however, the story looks very different when you look at margin from the bottom up. Suddenly, you find products running at 0% or even negative margins, while others sit at 70%+. The difference is almost always the same: hidden cost-to-serve items being spread evenly across the business instead of assigned to the customers and products that actually drive them.
Here are the four margin eroders we see over and over again.
1. List to Invoice: Where Your Price Quietly Slips Away
Your team has a set list price. But the real selling price is shaped by everything that happens in between: rebates, free goods, special terms, and all the “one time” concessions that mysteriously appear on every invoice.
Most companies track these items individually. Very few combine them into one clear list to invoice view. Without that view, you can’t see where value is leaking.
A report at the product and customer level usually tells a powerful story: customers who never buy at the approved price, reps or regions that rely heavily on exceptions, and products that consistently slide below their intended thresholds. You don’t need a perfect system; you just need a starting point to look at where the margin disappears.
2. Technical Services You Give Away
Engineering, technical service, customer success, and planning teams often sit in overhead, but their day-to-day work is driven by a small group of customers and SKUs. They handle custom designs, field issues, special approvals, schedule changes, rush orders, and troubleshooting.
A top down view of gross margin does not give you visibility into which customers and products are demanding the most time from your teams.
When you reassign even a rough estimate of their time to the customers and products that consume it, the picture changes fast. Some relationships suddenly look far less profitable, while others that are quiet and low maintenance start to shine. We recommend starting with basic time allocation of time spent on customers; this is enough to highlight which accounts are not profitable because you’re overallocating resources.
3. Transaction Fees: Freight, Tariffs, and Broker Costs
Pass-thru transaction fees seem straightforward—charge the customer what it costs, move on. In reality, these costs behave differently for every invoice, order, customer, and the “pass-through” often isn’t a pass-through at all. Those gaps can be small on a single order but huge in aggregate. A few dollars lost per shipment can erase the entire margin for a customer segment, a region, or a product family. This is especially true when costs are volatile.
This isn’t just a transaction fee problem—it’s a margin strategy problem.
The good news: you don’t need a complex model to find the leaks. Start by pairing two simple datasets (pass-through fees billed vs. pass-through paid) over the last 6–12 months. Break it down by invoice, order, customer, and segment if you can. You will quickly see where you consistently under-recover fees, and where policy updates could immediately tighten profitability.
4. Manufacturing Complexity: Hidden Product Opportunity Cost
Some products consume far more capacity than their top down Gross Margin suggest. They run on multiple machines, bounce between plants, require long changeovers, or have low yields and high scrap. On paper, they look fine. In reality, they soak up time on constrained assets that could be used for healthier margin products.
A routing map and a basic estimate of machine time (especially on bottleneck equipment) often reveal SKUs that should be repriced, simplified, migrated to alternatives, or discontinued. You don’t need a complete digital twin. Even a rough model will surface the products for tough conversations.
Pulling It Together: Build a Bottom-up Pocket Price Waterfall
Once you’ve identified these hidden costs, you can create your first pass at a bottom-up view of profitability: The Pocket Price Waterfall. It shows your margin journey from list price all the way down to what you actually keep after cost-to-serve at a customer or product level.
This tool flips the conversation at the leadership level. Instead of asking “Which products have the highest gross margin?”, you start asking:
- Which customers truly create value?
- Which products deserve continued investment?
- Where are we working hard but not getting paid?
If reading this makes you wonder, "Do we have visibility at a customer or product level of cost to serve?”, then you already know the next step:
Building your first pocket price waterfall can yield a few margin points that often turn into millions.
