Run a Profit Risk Scan

Run a Profit Risk Scan

What this is for

What you get

• A ranked list of margin risk vectors

• Quantified exposure (how big the hit could be)

• Early warning signals to monitor

• Mitigation actions tied to each risk

Core logic

Step-by-step

1. List primary risk categories

Common ones:

• Pricing pressure (competitors undercutting, buyer bargaining)
• Customer concentration (too much revenue from few clients)
• Cost inflation (suppliers, labor, fulfillment)
• Channel dependency (one channel degrading)
• Product mix shifts (low-margin offerings growing)
• Operational leaks (fulfillment errors, returns, discount erosion)

2. Quantify exposure per risk

For each:

• Estimate likelihood (low/medium/high)
• Estimate margin hit if it materializes (e.g., “10% price reduction from major competitor shaves 8 pts off contribution margin”)
• Identify dependency concentration (e.g., top 3 customers = 60% of revenue)

3. Score & prioritize

Combine impact × likelihood to rank. Focus first on high-impact, high-likelihood threats.

4. Define early-warning indicators

Examples:

• Competitive price changes (track competitor pricing or requests for discounts)
• Revenue share drift from top customers
• Rising cost per unit or supplier lead-time variability
• Shift in sales mix toward lower-margin items
• Increase in refunds/returns or support rework

5. Assign mitigation plays

For each top risk:

• Pricing pressure: Introduce differentiation, value framing, tiered pricing, contract locks.
• Customer concentration: Diversify pipeline, secure multi-period commitments, build secondary segments.
• Cost inflation: Hedge, renegotiate, pass through selectively, improve efficiency.
• Channel dependency: Test adjacent channels, build redundancy.
• Product mix drift: Rebalance focus toward higher-margin offers, adjust incentives.
• Operational leaks: Patch process, automate checks, tighten quality control.

6. Embed in cadence

Review risk scan monthly or when key inputs shift (new large customer, supplier issues, competitive moves). Update scores and trigger corresponding defenses early.

Decision thresholds / guardrails

• Single customer >30–40% of revenue → Treat as concentration risk; build backup pipeline or secure longer-term deals.

• Margin compression >5% quarter-over-quarter without clear offset → Drill into pricing, cost, and mix changes immediately.

• Repeated “near-miss” early warnings ignored → Escalate a formal contingency activation.

• Multiple high-ranked risks aligning (e.g., cost-up + price-down) → Activate layered defense: preserve cash, tighten promotions, accelerate diversification.

Examples

• B2B service: 50% of revenue from one client—risk scan flags concentration. Mitigation: negotiate multi-month retainer and accelerate outreach to secondary sectors.

• E-commerce: Supplier cost creep increases COGS; margin scan reveals shrinking contribution. Response: negotiate bulk pricing, shift to higher-margin bundles, and test passing a portion to price with clear value communication.

• SaaS: A new competitor undercuts entry pricing—scan triggers differentiation campaign, introduces usage-based upsell, and locks in existing customers with loyalty incentives.

Thinking checks

• What are the top 3 threats to your current margin, and how exposed are you?

• Do you have early indicators for each, or are you reacting after the fact?

• Are mitigation actions defined and resourced, or just “hope”?

• If two risks hit simultaneously, what’s the compounded impact and your fallback?

What to track (minimum)

• Risk scorecard (impact × likelihood) updates

• Customer concentration ratio

• Price variance vs. competitors

• Cost trend lines (input inflation)

• Mix shift effects on blended margin

• Frequency and resolution of early-warning triggers