What to do when a provider's gross margin falls
What a telecom provider should check when its gross margin starts falling, from prices and wholesale costs to product mix, and what it can change.
By Achekam · · 5 min read · For Telecoms businesses in South Africa, Nigeria, Kenya
Revenue is up on last year. Subscriber numbers are up. Yet the management accounts show that out of every rand, naira or shilling of sales, the provider keeps less than it did before its direct costs are paid. Nobody decided to become less profitable. It happened a few cents at a time: a wholesale price increase here, a promotion there, a growing share of low-margin packages, and a cost or two booked to the wrong line.
A falling gross margin is one of the earliest warnings a provider gets that its pricing and its costs have drifted apart. This article explains what gross margin measures, how to work out which of the usual causes is behind a fall, and what the realistic options are.
What gross margin measures, and what it does not
Investopedia defines gross margin as the percentage of a company's revenue retained after direct expenses, such as labour and materials, have been subtracted. It is gross profit expressed as a share of sales: gross profit is revenue less cost of goods sold as an amount, and gross margin is that amount as a percentage. Its guide to gross margin works through the calculation and its uses.
Investopedia also draws the boundary: gross margin considers only revenue and the cost of goods sold, whereas net margin takes all of a business's expenses into account. So a falling gross margin is about the direct economics of what you sell, not about head-office rent or marketing spend. For a provider, the direct costs usually include:
- upstream bandwidth and wholesale access fees paid to network operators;
- voice termination and interconnect charges;
- equipment supplied to customers and not recovered;
- installation and activation costs, where these are treated as direct.
Reading the margin month by month
Achekam's management accounts show an income statement for a chosen period beside the period before, and a balance sheet at period end, all added up from the business's own journals and exportable as PDF or CSV. Run them monthly and work out gross margin for each month: sales less direct costs, divided by sales.
One month's dip may be noise: a large equipment purchase expensed at once, or a wholesale invoice for two months arriving together. Three or four months of steady decline is a trend. Before investigating causes, make sure you are looking at a trend, and note the month it started. Something changed around then.
Price, direct cost or mix?
Almost every fall in gross margin comes from one of three places.
Price. Your average revenue per subscriber has fallen. Promotions that ran longer than planned, discounts agreed in tenders, or customers moving to cheaper packages all reduce revenue without reducing what each connection costs you.
Direct cost. What you pay per connection has risen. An upstream operator increased its wholesale price, a currency movement pushed up the cost of imported equipment, or voice termination rates changed.
Mix. Neither prices nor costs per product changed, but you are selling more of the low-margin products and less of the high-margin ones. Growth in basic home fibre, where wholesale access is a large share of the price, can dilute the margin from managed business services even while both product lines are healthy on their own.
Telling these apart needs revenue and cost by product line. Achekam posts all invoice revenue to a single sales account, and an invoice line cannot name another one. To see margin by product, add revenue and cost accounts per product line (accounts can be added, renamed or switched off) and reclassify the month's revenue into them with a manual journal, using your billing system's totals per package. It is a small monthly task that turns one margin figure into several you can act on.
Costs that crept into the wrong line
Sometimes the margin has not really fallen; it only looks that way because costs have been posted to cost of sales that belong elsewhere, or the reverse. The general ledger lists every posted line, and the trial balance shows each account for all time, for a period or at a date, and says whether debits equal credits. Open the cost of sales accounts for the months where the margin dropped and read the lines.
Common culprits for a provider:
- Capital items expensed: a batch of radios or a core switch booked to cost of sales instead of fixed assets.
- Overheads in direct costs: office internet, staff phones or a consultant's fee coded to bandwidth.
- Timing: two months of a wholesale invoice in one month, with nothing in the other.
- Credits missing: a supplier's credit for an outage received and not yet booked.
Corrections are posted as journals, and a posted journal is corrected only by a reversal, so the history of every adjustment stays visible. What counts as a direct cost is explained further in what belongs in cost of sales.
Budget against actual, account by account
A business can set a budget per account and period in Achekam and compare it with actual figures from its ledger. Budget each direct cost account from the expected number of subscribers and the contracted wholesale rates, and each revenue account from the expected packages and prices. When the margin falls, the budget comparison shows which line moved: if bandwidth costs are over budget while revenue is on budget, the cause is cost; if revenue is under budget while costs are on target, it is price or mix.
Splitting costs into their fixed and variable parts sharpens the budget further; the high-low method for a provider's costs shows how.
What you can change
Investopedia notes that a company with a falling gross margin might try to cut labour costs, find cheaper material suppliers or raise prices. In a provider's terms:
- Prices: end promotions on schedule, review discounts in renewals, and move customers off legacy packages priced below today's cost.
- Suppliers: compare wholesale operators where several serve the same area, renegotiate volume terms, and check that outage credits owed by upstream providers are claimed.
- Costs: recover equipment from cancelling customers, reduce failed installation visits, and review whether direct labour is being used efficiently.
- Mix: steer sales incentives towards the packages with healthier margins, not just the most connections.
A monthly margin routine
Calculate gross margin for the month and for each product line, compare it with the same month last year, read the cost of sales lines for anything that looks out of place, and write one sentence on what moved and why. A short explanation each month is far easier than a long investigation after a year of drift.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
