Gross Margin vs Customer Profitability for FMCG Distributors

What gross margin proves

Gross margin compares net sales with product cost. When sales, discounts, returns and COGS reconcile to the ERP or general ledger, it provides a defensible view of the product value retained from each customer.

It should remain visible as its own layer. Mixing overhead allocations into gross margin makes the result harder to reconcile and easier to dispute.

• Net sales after discounts and returns
• Customer-level COGS
• Gross profit value
• Gross-margin percentage
• Customer × SKU contribution
• Price and cost trend

What customer profitability adds

Customer profitability can add direct or supportable cost-to-serve: delivery cost, picking effort, commissions, special handling, returns administration, payment cost and credit exposure. Only use a cost when the source and allocation rule are visible and agreed.

A directional allocation should be labelled as a scenario—not presented as an accounting fact.

Use both layers for decisions

First identify the customer and SKU economics at gross-profit level. Then test whether service and working-capital requirements materially change the ranking. The decision may be to grow, protect, repair, reprice, change service terms or review the relationship.

• Keep reconciled facts separate from allocations
• Show the allocation basis and sensitivity
• Prioritize material exceptions
• Consider strategic assortment and supplier roles
• Assign an owner and next action
• Track actual improvement after intervention