Choose the right gross margin target

Who this is for

Founder led lower-middle market companies with 5 to 50 million in annual revenue that want clear margin goals and a way to reach them.

The quick answer

Set targets by segment and by offer. Start with your last four quarters, peer benchmarks, and mix. Lift margin with price, mix, and delivery changes rather than volume alone. Track a monthly margin bridge that shows price effect, cost effect, and mix effect so everyone sees what moved results.

The method in seven steps

Build your baseline
Pull the last four quarters of gross margin by segment and offer. Note seasonality and any one time items.
Gather peer context
Use trusted benchmarks and recent quotes from suppliers and competitors that your team hears in the field. Treat this as a range not a rule.
Set targets per segment and offer
Pick a one year target and a next quarter waypoint. Higher service or complex delivery should carry higher targets than commodity items.
Write three improvement levers
Price moves by list and by fences. Mix moves through bundles and tiered plans. Delivery moves through waste removal, rework cuts, and service level focus.
Publish the margin bridge
Each month show price effect, cost effect, and mix effect. Use simple bars so non finance leaders can explain the story.
Assign owners
Pricing owner, delivery owner, and sourcing owner. Each brings actions to the monthly review.
Link to cash and growth
Show how margin targets protect cash conversion and fund growth moves so the team sees the bigger picture.

Example

A distributor split targets by three segments and two offer types. The margin bridge showed discount creep in one region. After resetting fences and bundling high value items, gross margin rose one and a half points in two quarters.

Pitfalls and fixes

One blanket target for all offers. Use segment and offer targets.
Chasing volume to hit margin dollars. Protect rate first.
Bridges that only finance can read. Use a simple three bar view.

Checklist

Four quarter baseline by segment and offer
One year targets and next quarter waypoints
Three levers with named owners
Monthly margin bridge in leadership pack