Customer, product and range mix

Customer, product and range mix

Two euros of sales do not create the same value

In most mid-sized industrial and distribution companies, margin is not lost by selling too little or spending too much, but by selling the wrong things to the wrong customers, with a level of complexity nobody pays for. Correcting the customer and product mix, and disciplining the product range, is the lever that releases the most operating margin with the least investment, and the only one that acts on the income statement and the balance sheet at the same time: every extra SKU costs twice, in margin and in cash.

• Ranked by real profit (after cost-to-serve), a minority of customers generates well over 100% of profit and the tail destroys it: in the classic Kanthal case, 20% of customers generated 225% of profit. The same happens with SKUs, and each SKU also ties up inventory that is financed with debt.
• One range strategy can improve EBITDA and destroy free cash flow at the same time; another can slightly reduce sales while increasing margin, liquidity and value all at once. That is why the P&L and net working capital (NWC) are analysed together, never separately.
• The levers are well known —pocket price waterfall, minimum order and complexity surcharges, low-cost channels, SKU pruning, standardisation, commissions on margin and collection— and, in our illustrative case, they take EBITDA from 6.0% to 9.1% of sales while invoicing 4% less, and release €0.93M of working capital that reduces net debt.
• A buyer only pays for the improvement if it is consolidated in closed accounts and in the working capital peg; an inventory clean-up the quarter before closing is handed back in the price adjustment.

Why margin is decided in the mix, not in volume

When margin falls, the typical reaction is twofold: push sales and cut costs. Both may be necessary, but neither tackles the most frequent problem we find when we open an income statement: the company grows in the customers and products that leave the least margin, and the accounts do not show it because they only show averages.

The volume trap and the gross margin illusion

The implicit assumption in many management teams is that any additional volume dilutes fixed costs and improves results. In practice, growing without discrimination means adding structure, multiplying SKUs in stock, expanding the sales force and financing a growing receivables balance. Revenue rises, ROIC falls and cash runs out: this is the scale trap, one of the root causes we analysed in why companies fail.

Conventional accounting feeds that illusion. By allocating selling, logistics and administrative expenses as a fixed percentage of sales, it assumes every euro invoiced consumes the same resources. It does not: a customer who demands discounts, split deliveries, dedicated support and 120-day payment terms can show a positive accounting gross margin and a negative real contribution margin once its cost-to-serve and the financial cost of the working capital it ties up are charged.

Decomposing the margin variance: price, volume, cost and mix

Any change in gross profit between two years breaks down into four effects: price (tariff changes on the year's units), volume (more or fewer units at the opening average price and margin), unit cost and mix (change in the relative weight of what is sold). This is the Price-Volume-Mix analysis, the margin bridge a buyer asks for in every due diligence. The first three effects are on the executive committee's radar; the fourth almost never.

An example with two product families, with no changes in prices or unit costs:

The company sells 10% more and its gross profit barely rises 2.5%: three quarters of the growth has been eaten by the mix. If management only looks at revenue and average margin, it will conclude that “sector margins are falling”, when what has actually happened is that the sales force has pushed whatever was easiest to sell.

The environment does not help. According to the Bank of Spain’s quarterly Central Balance Sheet Office, ordinary net profit of non-financial companies grew only 0.4% in 2025 with turnover up 3.4%, and return on assets fell from 7.2% to 6.5% (in industry, from 7.5% to 5.7%). The CEPYME Indicator for the second half of 2025 puts the increase in SME labour costs since 2015 at 26.3%, against 6.2% in productivity per employee. With structurally higher costs, margin has to be earned transaction by transaction, as we explained when discussing how to protect your gross margin against cost increases.

From gross margin to economic margin: the framework management should use

The goal is not to maximise accounting gross margin, but economic margin after cost-to-serve, complexity and the working capital consumed. A sale only creates value if, after paying what it costs to serve and finance it, it leaves more than the cost of the capital it ties up.

The real margin waterfall

The financial cost of customer credit is calculated without sophistication: annual sales × days sales outstanding / 365 × cost of capital. With €2M of sales, 120 days and 8%, that is €52,600 a year the customer never sees on its invoice, but the company sees on its credit line.

Capital-adjusted contribution

The next step is to charge each customer or segment for the capital it requires. Economic contribution = contribution margin − cost-to-serve − attributable NWC × cost of capital rate. An illustrative example with three segments of a distributor and a cost of capital of 10%:

Key accounts represent 40% of revenue and contribute no more economic value than the mid-market, which sells less, costs less to serve and ties up half the capital. Segmenting by volume is convenient; segmenting by economic contribution is what changes decisions.

The P&L and cash are looked at together: FCF and the cash conversion cycle

Operating free cash flow, in its usual formulation, is: FCF = EBIT × (1 − t) + depreciation − CapEx − ΔNWC. It is the practical adaptation of Damodaran's free cash flow to the firm, which includes the change in working capital within the reinvestment deducted from after-tax operating profit. Two consequences: a range decision that raises EBIT but requires more inventory and a larger receivables balance can reduce the year's FCF, and one that releases NWC generates cash even if EBIT does not move.

Net working capital is the net investment in operating current assets and liabilities the business requires: inventory + receivables + operating cash − payables and other spontaneous liabilities. It is a need of the business, and whatever permanent funding does not cover is financed with credit lines and invoice discounting. Its intensity is read in the cash conversion cycle: CCC = DIO + DSO − DPO, where DIO is days of inventory over cost of sales, DSO is days sales outstanding over sales and DPO is days payable outstanding over purchases. Every day the range or commercial terms add to the cycle is one more day of sales that has to be financed.

Customer profitability: the whale curve

What the evidence says

The most revealing tool for an executive committee is the whale curve: customers are ranked from most to least profitable and their profit is accumulated as a percentage of the total. R. Kaplan and V. Narayanan (2001) described a very frequent pattern: the most profitable 20% of customers generate between 150% and 300% of total profit, the central 60-70% hover around break-even, and the least profitable 10-20% destroy between 50% and 200%.

That last figure is the one that makes a family business most uncomfortable. The three segments of the curve have their own profile:

• Profit makers buy standardised, high-turnover operations with collection on agreed terms;
• Profit neutrals cover their direct costs and their share of overhead without adding any profit;
• Value destroyers combine small, frequent orders, continuous changes, urgent logistics, returns and late payment.

Cost-to-serve: two customers, same price list, opposite results

The ERP's gross margin only captures invoice price minus product cost. Everything else —rebates, freight, financing of receivables, number of orders, visits, returns— is diluted in overheads.

Example: Two customers of an industrial distributor each buying €200,000 at list price:

In the ERP, both look acceptable. After cost-to-serve, one contributes almost €44,000 and the other destroys more than €14,000. And B is probably the customer who calls the most and receives the most visits. Moreover, its 120 days of collection tie up twice the working capital of A's 60 days: that balance also has to be financed.

TDABC without dying in the attempt

You do not need a two-year cost accounting project. Classic ABC failed in many companies because of its complexity; Kaplan and Anderson proposed time-driven ABC in Harvard Business Review in 2004: estimate the cost per minute of each department's practical capacity and the time each activity consumes. The cost of serving a customer is the sum of the time it consumes multiplied by the cost per minute of each resource. With five or six well-chosen drivers —orders, order lines, deliveries, visits, returns and days sales outstanding— an SME captures most of the cost difference between customers. For SKUs, add warehouse locations occupied and days of inventory.

The most common allocation mistakes: spreading overhead in proportion to sales (which subsidises small customers and penalises large, efficient ones), ignoring off-invoice discounts, treating freight as a general cost, and not charging the financial cost of receivables or inventory. That is why supply chain leaders are advised to implement a cost-to-serve model: many already suspect that some products and customers are unprofitable, but lack a structured approach to define and resolve the problem.

Range decisions: every SKU costs twice

Breadth (how many families), depth (how many variants per family), the long tail of slow movers, the degree of customisation and the balance between own and resold range are general management decisions, not purchasing or marketing ones. This is where commercial decisions touch the income statement and the balance sheet at the same time. A range is judged by two numbers: the contribution margin it leaves after its complexity costs and the NWC it consumes.

The range from the margin side

Each variant looks profitable in its gross margin, but drags costs that do not appear on its data sheet: changeovers and setups, smaller batches, fragmented purchases that lose volume rebates and pay more inbound freight, warehouse locations and handling, picking errors, obsolescence and planning effort. Bain has documented this for years: in its survey of more than 900 executives ("Cutting through complexity"), close to 70% admitted that complexity was hurting their profits. Ulrich Thonemann and James Bradley (European Journal of Operational Research, 2002) showed that, with significant setup times, the cost of variety grows almost linearly with the number of products.

McKinsey provides the most graphic examples. In automotive (“Finding the true cost of portfolio complexity”), an engine that under conventional cost allocation appeared to cost 10% less than the standard alternative turned out to be 20% more expensive once its complexity was correctly charged.

In consumer goods, a company that had increased its SKUs by 66% in three years saw sales per SKU fall 40% and margin fall 10%; after cutting the portfolio by 25%, it improved gross profit by 3%. In retail, an e-grocery pilot cut SKUs by 36% with a projected +1-2% in sales and gross margin, and the firm’s assortment benchmark estimates up to 0.5 points of margin from systematic delisting, another 0.5 from supply chain simplification and 2-4% of sales from strategic listing.

In industrial manufacturing, rationalisation plus standardisation can cut costs by around 7% in certain portfolios. These are orders of magnitude, not percentages applicable to any company.

The key is to measure contribution margin per SKU after complexity costs and the cost of capital of its inventory, not catalogue gross margin. And a less intuitive lesson McKinsey highlighted in 2024: removing a single product rarely reduces complexity, because it shares components, machines and suppliers with others; groups of SKUs have to be pruned so that the savings exceed the lost sales. When there is a production bottleneck, moreover, what matters is margin per unit of the scarce resource (machine hour, engineering hour, metre of shelf space), not unit margin.

The range from the working capital side

The range moves all three NWC variables at once:

• Inventory. SKU proliferation fragments demand. Each SKU's safety stock grows with the variability of its demand and the square root of its lead time (SS = Z × σ × √L), and risk pooling theory (Gary Eppen, Management Science, 1979) adds the practical rule: with independent demands, total safety stock grows with the square root of the number of SKUs into which the same demand is split. Splitting one SKU into four equivalent variants doubles its safety stock for the same service level. On top of that come each SKU's supplier minimum order quantities and obsolescence, which is born in the long tail.
• Receivables. Customised ranges lengthen collection periods: more invoicing disputes, disagreements over specifications, longer inspections at destination and more commercial tolerance of late payment to justify small sales. In Spain payment is already slow: CEPYME's Late Payment Observatory put the average payment period at 80.5 days in 2025, and the Bank of Spain notes that large companies pay later than SMEs.
• Payables. A broad range fragments purchases across more suppliers: volume discounts are lost, payment terms worsen and minimum order quantities force overstocking.

The European context confirms it: PwC's Working Capital Study 25/26 puts days of inventory in the EU's most working-capital-intensive sectors at 90.2 in 2024, versus 68.6 in North America, and identifies mid-sized companies as the most exposed, with 15 more days since 2015. The cost of that inventory is rarely measured: on top of the credit line rate you have to add warehousing, insurance, shrinkage and obsolescence; as an indicative order of magnitude, holding inventory typically costs between 15% and 25% of its value per year. Slow-moving stock is tied-up capital that pays interest every month and depreciates without making a sound.

Expand, reduce or premiumise: what happens to FCF

The three big range decisions have different financial profiles. Expanding increases coverage but requires safety stock, minimum purchases, setups and sometimes CapEx. Reducing concentrates volume, releases inventory and capacity, but removing a genuinely unique SKU loses sales rather than transferring them: substitutability must be measured before delisting. Premiumising raises price and unit margin, but if the product requires more expensive materials, slow manufacturing, slower-moving inventory or a channel with long payment terms, NWC and CapEx can absorb the EBIT improvement.

Illustrative example in millions of euros, with a 25% tax rate:

ΔFCF = ΔEBIT × (1 − 25%) − CapEx − ΔNWC. Premiumising delivers the largest EBIT improvement and still reduces first-year FCF: this is not a universal truth about premiumisation, it is the reason margin and reinvestment are modelled together. With a caveat Damodaran reminds us of: the NWC release happens once; once the efficient level is reached, working capital grows again with the business.

To see it in a concrete case, the following table isolates the range effect in the distributor of the case study, with the same multiple before and after:

The shorter range sells 1.7% less and earns more, but the relevant line is the last one: of the €1.16M of additional shareholder value, 0.54 comes from EBITDA and 0.62 from the cash released, which also saves around €31,000 a year in interest. More than half the value created by pruning does not appear in the income statement, but in the balance sheet.

The four roles of a SKU and the margin × NWC matrix

The range stops being classified into "sells" and "does not sell". Each SKU plays one of four roles: it generates profit, it wins customers, it is strategic to complete a solution, or it destroys value with no differentiating function.

To decide, Maraz proposes crossing two axes: net contribution margin (after TDABC) and NWC intensity (days of working capital the SKU requires).

The bottom-right quadrant —low margin, months in the warehouse, customers paying at 90 or 120 days— is the most frequent cause of the liquidity squeezes we see in SMEs that are “doing fine”. The strategy for the niche range is not to eliminate it, but to finance its cycle at the expense of the customer who asks for it.

Cross-impact of range decisions

Entry, maintenance and exit rules

• Entry. No new SKU without committed minimum volume, estimated contribution margin after complexity and inventory cost, forecast incremental inventory and a candidate SKU for exit. A new listing must justify its margin and its cash.
• Maintenance. Review every quarter the SKUs with fewer than six movements a year and low contribution margin, and measure annual gross margin per euro of average inventory (GMROI) by family.
• Exit. Never delist without looking at associated sales and demand transfer: if the best customers order it together with high-margin products, keep it or reprice it. Offer a substitute, withdraw by family and liquidate the remaining stock: the liquidation loss is recognised once, the cash is recovered for good.
• Listing is not stocking. A long range is justified when it is the value proposition and the customer pays for it; even so, the tail can be served to order, by direct supplier delivery or with longer lead times, without own stock.
• Standardise what the customer does not value. In manufacturing: platforms, common components and late-stage customisation. The resold range is lightened by agreeing smaller lots, consignment or frequent replenishment with the supplier.

The customer × product matrix and concentration risk

The step many companies skip is crossing both analyses. A profitable customer may be profitable thanks to one specific family, and a mediocre product may be essential to retain a large customer.

The matrix is completed with concentration: the weight of the top customer, the top five and the top ten, in sales and in margin. Margin concentration is usually worse than sales concentration, and it is the one a buyer looks at. The problem is not having large customers, but depending on them without a contract or an alternative. The thresholds that circulate in the market (alert above 10% in one customer, serious problem above 20-30%) are practitioners’ rules of thumb, not statistics, but they reflect how buyers react to a red flag in due diligence: lower multiple, deferred payments or walking away from the process.

Concrete levers to improve the mix

Discipline in the pocket price waterfall

Michael Marn and Robert Rosiello, of McKinsey, published in Harvard Business Review in 1992 the calculation every CFO should keep at hand: for the average company in their sample, a 1% price improvement raised operating profit by 11.1%, against 7.8% from an equivalent cut in variable costs, 3.3% from more volume and 2.3% from lower fixed costs. The tool to capture that 1% is the pocket price waterfall: from list price to pocket price, through on-invoice discounts, rebates, promotions, freight and payment terms.

In a lighting supplier analysed by McKinsey, the average pocket price was half the list price and many small customers enjoyed better terms than large ones because they knew whom to call; once order was restored, the pocket price rose 3.6% and operating profit 51% in one year. In the Spanish SME, the leak is in rebates with nothing in return, free freight and payment terms nobody negotiates.

Minimum order, complexity surcharges and low-cost channels

Customer B in the example does not need a smaller discount; it needs a different service model: minimum order with surcharge, freight charged below a threshold, explicit charges for urgent delivery, split lots or special handling, fixed delivery days by zone, and an online channel or inside sales instead of visits. Indexing price to complexity gives the customer the choice of adapting its ordering pattern or paying what it costs. The goal is not to push the small customer out, but to make it pay for what it costs to serve.

Cross-selling and active portfolio management

With the matrix, the sales team knows which higher-margin families to offer each good customer. Product-and-service bundles, scheduled deliveries and premium versions shift the mix without touching the price list: it is another way to stop competing on price. Beware of consignment stock: it is a good sales argument, but it is your own inventory sitting at the customer's premises and it counts in NWC.

Unprofitable customers: renegotiate before exiting

Exit is the last resort and only makes sense if the associated costs and NWC are avoidable; a loss-making customer that absorbs fixed overhead worsens the result when it leaves. The right sequence: show the customer what it costs to serve them, propose new terms (price, minimum order, payment terms or advance payment for low-margin accounts), allow a reasonable period and only then accept their departure. A significant share of loss-making customers accept when presented with the numbers.

Sales incentives on margin and collection, not on revenue

If salespeople are paid on revenue, they will grant discounts, give away freight, sell what is easy and win complex accounts that strain cash. McKinsey ("Seven tests for B2B growth", 2025) considers a margin component in variable pay to be the bare minimum, and BCG (2024) shows how price and margin metrics align the salesperson with profitability, with the caveat that they can lead them to sell isolated high-margin products instead of the complete solution.

A simple formula, consistent with what we advocate on executive compensation and value creation: commission = percentage of net contribution margin, multiplied by a factor that penalises every day of collection above target (for example, 1 − α × (actual DSO − target DSO) / target DSO). If variable pay is based on contribution margin and days sales outstanding, the mix and NWC start to correct themselves.

Case study: Distribuciones Levante

Distribuciones Levante (fictitious; all figures are illustrative) is an industrial supplies distributor with €24M of sales, 1,200 customers, 9,000 SKUs, a 26% gross margin and EBITDA of €1.44M (6.0%). Its top customer accounts for 22% of sales and the top five for 48%. Its NWC amounts to €5.9M (24.6% of sales: 80 days of inventory, 75 of receivables and 60 of payables) and its net debt to €4.0M. Management believed the problem was volume. The whale curve said otherwise:

Of the €0.91M the tail loses, only around €0.45M were avoidable costs; the rest was overhead that would remain even if those customers disappeared. That is why the decision was not to “fire 300 customers”, but to change how they are served.

Over twelve months the following were implemented: a €150 minimum order with a €15 surcharge and an online channel for the tail; a review of the pocket price waterfall, including shortening the average collection period from 75 to 70 days; cross-selling of higher-margin families to the 240 best customers; pruning of 2,200 SKUs by family, with substitutes and liquidation of remaining stock; standardisation of formats in the own-brand families; and commissions on margin and collection. Two key accounts were renegotiated: one accepted a 3% increase and the other reduced its low-profitability purchases.

Sales fell to €23.1M (−4%), gross margin rose to 27.6% and EBITDA went from 6.0% to 9.1%. The top customer fell to 17% and the top five to 41%. In parallel, working capital moved as follows:

NWC falls to 21.5% of sales and the cash conversion cycle from 95 to 82 days. The FCF of the restructuring year captures both: the additional after-tax EBIT and a negative change in NWC that comes in as direct cash. With illustrative multiples of 6.0x before and 6.5x after —buyers pay more for predictable cash flows, diversified portfolios, inventory turnover and well-managed working capital—, enterprise value goes from around €8.6M to around €13.7M, and equity value (enterprise value minus net debt) from around €4.6M to around €10.6M.

Selling less, the company is worth more than €5M more and the shareholder gains almost €6M, of which €0.93M is cash that was sleeping in the warehouse and in the receivables ledger.

Roadmap: how to turn the mix into a recurring lever

The process is not an indiscriminate contraction of activity, but an orderly plan of commercial and financial re-engineering, led jointly by Finance, Sales, Product and Operations. The data almost always exist; what is missing is crossing them: invoice lines with customer, SKU, price and cost; credit notes, rebates and commercial agreements; logistics costs per delivery; actual days of collection; CRM visits; warehouse and administration time; and inventory by SKU with ageing and last movement. A typical project lasts 8 to 12 weeks and is organised in four phases:

1. Diagnosis. TDABC, Price-Volume-Mix bridge, whale curves of customers and SKUs, and NWC map by customer and by SKU.
2. Categorisation. Profitability × working capital intensity matrix and the role of each SKU.
3. Intervention. Profit makers: retention, value-based pricing and protection. Neutrals: upselling, cross-selling and standardisation. Value destroyers and inefficient range: option A, tariff restructuring with minimums and surcharges; option B, channel migration to online or inside sales; option C, disengagement only if costs and NWC are avoidable.
4. Institutionalisation. Commissions linked to net contribution margin and days sales outstanding, a quarterly committee for SKU listings and delistings and pricing exceptions.

A control checklist before closing each phase: do we have a P&L by customer-SKU combination? Has the price waterfall been rebuilt? Can we allocate inventory, receivables and payables by customer, SKU and family? Does each SKU have an explicit role? Do we know which demand migrates and which is lost if we delist it? Does each scenario include EBIT, NWC, CapEx and FCF? Have we validated elasticity and demand transfer with a pilot before scaling?

Indicators worth tracking

• Contribution margin by customer and by SKU, after cost-to-serve, and capital-adjusted contribution.
• Realised pocket price and its dispersion by family; cost-to-serve as a percentage of sales by segment.
• Margin per hour of capacity at the bottleneck (key in manufacturing).
• Concentration of the top, fifth and tenth customer, in sales and in margin.
• Active SKUs, listings and delistings in the period, and percentage with fewer than six movements a year.
• Days of inventory and GMROI by family; stock with no movement in more than 12 months and its provision; service level and stock-outs.
• DSO, DIO, DPO, cash conversion cycle, NWC over sales, FCF and ROIC.

Governance and the CFO's role

The model needs an owner —the finance director or, in many SMEs, a fractional CFO— who maintains it, presents it to the committee every quarter within the balanced scorecard, validates off-policy discounts and approves new SKU listings with their business case for inventory, complexity and FCF. For the CFO, the portfolio becomes a capital allocation decision; for Sales, price, service and collection are a single equation. Without governance, within eighteen months the price waterfall fills up again with exceptions and the catalogue with SKUs.

Risks and common mistakes

• Confusing low volume with low value. A small SKU may complete a range, win a segment or drive cross-sales; demand transfer must be measured before delisting.
• Cutting customers or SKUs that absorb fixed costs. There is only permanent saving if avoidable resources disappear; if warehouse, fleet and staff are not adjusted, everyone else's unit cost rises: that is operating leverage working against you.
• Optimising margin at the expense of service. Too little stock causes stock-outs, an aggressive collection period damages the commercial proposition, and stretching supplier payments loses early-payment discounts.
• Premiumising without measuring elasticity. The increase in average price must be weighed against volume loss, trade-down, cannibalisation and additional capital.
• Turning rationalisation into a one-off project. Leaders review their SKUs more frequently and integrate the supply chain into every listing and delisting. The range needs permanent governance, not a clean-up every five years.

Mix, normalised EBITDA, NWC and enterprise value

In the middle market, enterprise value is summarised as normalised EBITDA × multiple, and the equity price as enterprise value minus net debt, adjusted for the difference between the NWC delivered at closing and an agreed normal level. Optimising the mix and the range acts on all three terms: it raises EBITDA by eliminating the drain of loss-making operations, reduces net debt with the cash released from working capital and improves the multiple, because strategic buyers and funds pay more for predictable cash flows, diversified portfolios, stock that turns and working capital managed with discipline.

As a reference, the Argos Index put the median multiple of the eurozone mid-market at 8.8x EBITDA in the second quarter of 2026, with funds at 10.2x and strategic buyers below 8x. These are larger deals than many Spanish SMEs, but they illustrate how much value separates an asset perceived as high quality from one that is not.

A Quality of Earnings review will analyse margin by customer and product over the last three to five years, the Price-Volume-Mix bridge, concentration, and whether margin rests on exceptional terms or on customers who might leave with the change of ownership. Every tenth of a multiple gained through lower risk is multiplied across the whole EBITDA, not just the improvement. That is why the mix should be worked on 12 to 24 months before going to market: the buyer wants to see the improvement in closed accounts, not in a projection.

NWC in due diligence: normalisation and the working capital peg

The financial due diligence sets the normal level of NWC (the working capital peg, which we explained when comparing locked box and completion accounts) based on monthly NWC over the last 12 to 24 months, adjusted for seasonality and non-recurring items. If less NWC than the peg is delivered at closing, the price falls euro for euro; if more is delivered, it rises. Three consequences for the range:

• Obsolete stock is cleaned out. The buyer will review inventory ageing and exclude or provision what does not sell. If stock write-offs are recurring and were not in the income statement, it will also adjust normalised EBITDA downwards: the obsolescence of a long range is a cost of the business, not an extraordinary item.
• Excess inventory is hidden debt. Inflated stock appears as an asset, but it has been financed with credit lines and will only be worth something if it sells. The seller will try to have it count as cash; the buyer, to keep it from raising the peg. The healthy approach is not to arrive with that debate open.
• The improvement has to be structural. Grant Thornton (2026) lists accelerating collections, delaying payments and reducing inventory to release cash among the window-dressing practices before a sale, and warns that a badly set peg ends in price leakage or litigation. If pruning is done the quarter before closing, the peg calculated on the historical series will sit above the NWC delivered and the seller will hand back in the adjustment what it gained in cash. Consolidated 12 months earlier, the new range becomes the normal level and the cash released reduces net debt for good.

A disciplined range is the only lever that improves all three terms of the value equation at once: EBITDA, multiple and net debt.

Conclusions on Customer, Product and Range Mix

1. Measure before acting: net contribution margin and NWC by customer and by SKU, after cost-to-serve and complexity, with a charge for the capital they consume.
2. Draw the whale curve of customers and SKUs, and separate avoidable cost from overhead.
3. Close the leaks in the price waterfall before raising list prices, including payment terms.
4. Change the service model for small customers and pass the complexity they demand through to price, rather than pushing them out.
5. Prune the range by family, measuring substitutability, margin and cash: every extra SKU costs twice.
6. Model every range decision with EBIT, NWC, CapEx and FCF, not just margin: expanding and premiumising can consume the cash they promise.
7. Set SKU entry rules and distinguish what is listed from what is stocked.
8. Pay the sales force on contribution margin and days sales outstanding, not on revenue.
9. Reduce margin concentration and consolidate the NWC improvement at least 12 months before selling, so that the working capital peg captures it and the cash released reduces net debt without argument.

The efficient frontier is not the smallest range, nor the largest customer, nor the product with the highest percentage margin. It is the combination that maximises sustainable contribution per euro of capital employed, while preserving positioning, growth and service. When that discipline is built into the regular planning, pricing and range management process, the question shifts from "how much can we sell?" to the one that really creates value: which sales, to which customers and with which range generate the most economic margin and the most free cash flow per euro of capital committed?

At Maraz Corporate Finance we carry out these analyses with family-owned and mid-market companies, from the fractional CFO role, in strategy consulting projects and in preparing a company for sale. Few decisions move margin, cash and company value as much as knowing, with numbers, which customers and which products sustain the business. If you want to know where the margin and the cash are hiding in your mix, let’s talk.

Javier de Rojas Roca de Togores

Partner - Maraz Corporate Finance

FAQs on customer product and range mix

What is the difference between a customer's gross margin and its net contribution margin?

Gross margin is invoice price minus product cost: what the ERP calculates. Net contribution margin starts from the pocket price (after discounts, rebates, promotions and freight not passed on), deducts cost-to-serve (orders, order lines, deliveries, visits, returns and support, charged through TDABC) and also deducts the financial cost of the working capital that customer ties up: sales × days sales outstanding / 365 × cost of capital. Two customers on the same price list can show gross margins of 27% and 20% and, after that waterfall, a net result of +€44,000 and −€14,000.

Gross margin says how much is earned per unit sold; net contribution margin says whether that customer is worth having. It is the figure on which prices, service models and commissions should be decided.

What is net working capital and why does the product range inflate it?

Net working capital is the net investment in operating current assets and liabilities the business requires: inventory plus receivables plus operating cash, minus payables and other spontaneous liabilities. It is not the same as the accounting working capital funded with permanent resources; whatever that funding does not cover is financed with credit lines and invoice discounting.

The range inflates it in three ways: each SKU adds its own safety stock and its supplier minimum order quantity (Eppen’s square-root law: splitting one SKU into four equivalent variants doubles its safety stock), customised ranges lengthen the collection period through invoicing and inspection disputes, and fragmenting purchases across more suppliers worsens payment terms and discounts.

We explain it in detail in what is working capital and why it is critical for business. Every euro of inventory the range requires is a euro of bank debt or of cash that is not in the bank.

How do I know whether my largest customer is really profitable?

By building its price waterfall and its cost-to-serve over a full financial year. The warning signs are well known: discounts and rebates above average, freight and urgencies not passed on, frequent split deliveries, dedicated technical support, returns and a long collection period. In the Kanthal case studied by Kaplan, two of the highest-volume customers were among the least profitable.

The definitive test is capital-adjusted contribution: contribution margin minus cost-to-serve minus attributable working capital multiplied by the cost of capital. A customer that accounts for 40% of revenue and ties up half the working capital may contribute the same as one that accounts for 35% with a quarter of the capital. If it also weighs more than 20% of sales with no contract, the problem is not only margin, but risk and valuation. A buyer will discount it in the due diligence.

When should a SKU be delisted and when should it be kept?

It is delisted when its contribution margin, after complexity costs and the cost of capital of its inventory, is low or negative, its turnover is below the set threshold and its demand is substitutable: most of the sales migrate to another SKU rather than being lost. It is kept when it plays a role that does not show on its data sheet: it wins customers, it completes a solution the best customers buy together with high-margin products, or it is a high-margin niche SKU whose financial burden can be passed on to the customer through advance payments, milestone billing or a special manufacturing surcharge.

Two practical rules: prune by family and not SKU by SKU, because an isolated SKU shares components, machines and suppliers with others and removing it barely reduces complexity; and liquidate the remaining stock, because the liquidation loss is recognised once and the cash is recovered for good. Listing is not stocking: the long tail can be served to order without own stock.

How do the customer mix and the range affect company value in a sale?

They act on all three terms of the value equation. Normalised EBITDA rises by eliminating the drain of loss-making customers and SKUs.

The multiple improves because buyers pay more for predictable cash flows, low concentration, stock that turns and well-managed working capital, and penalise concentration with a lower price, deferred payments or walking away from the process.

And net debt falls with the cash released from inventory and receivables, which raises equity value euro for euro, as we show in the equity bridge between enterprise value and equity value. In the article’s illustrative case, invoicing 4% less, EBITDA goes from 6.0% to 9.1%, working capital releases €0.93M and equity value more than doubles. The condition is that the improvement is consolidated in closed accounts, at least 12 months before going to market.

What is the working capital peg and why can it cancel out the cash I release before selling?

The working capital peg is the normal level of net working capital that buyer and seller agree as the reference in the sale, calculated by the financial due diligence on monthly working capital over the last 12 to 24 months, adjusted for seasonality and non-recurring items.

If less working capital than the peg is delivered at closing, the price falls euro for euro; if more is delivered, it rises. That is why an inventory reduction or an acceleration of collections carried out the quarter before closing does not stay with the seller: the peg, calculated on the historical series, will sit above the working capital delivered and the difference is handed back in the adjustment. The buyer’s advisers identify these window-dressing practices and, in addition, will exclude or provision obsolete stock and adjust EBITDA downwards if stock write-offs were recurring.

Range pruning only creates value in a sale if it is executed early enough for the new working capital structure to become the normal level. We develop this when comparing the locked box and completion accounts mechanisms.