The segment margin is a measure of the profitability of a specific aspect of a business and how it contributes to the profit margin of the business as a whole. By segmenting the different divisions of a business, management should be able to see which aspects are the most profitable and which may be struggling. A business may be segmented in many different ways, including by product line, location, and department. It is important to consider the costs associated with each segment of a business when using segment margin as a determining factor for how the business should be configured and whether or not one segment should be discontinued.
Businesses calculate their profit margin by taking all the revenue they have earned and subtracting the costs it takes to produce that revenue. While doing this can give a solid overview of a company, it might miss out on the individual reasons why its business might be succeeding or failing. For example, a company might have a poor profit margin that is being weighed down by one particularly weak aspect of the business. Calculating the segment margin will show how the individual components of a business contribute to the overall profit margin of the business as a whole.
To figure out each specific segment margin, each segment must be separated in terms of its costs and revenues. Once this is done, each segment should have its own specific profit margin which, when combined with the margins of other segments with certain fixed costs subtracted, should add up to the total profit margin. Each segment may also be measured in terms of the percentage of the overall profit margin it produces, giving managers a good idea of which segments are most valuable.
There may be many different ways in which segment margin might be analyzed. A retail business that has stores in many locations might consider each store a segment. If a company sells many different products, each product line can be studied as a segment of the business. In addition, if the revenues and costs can be accurately measured, the different departments of a company can be separated into segments.
It is important when analyzing the segment margin to consider the costs involved with each segments. Certain segments may have costs that are unique to their portion of their business, which can have a significant impact on their respective profit margins. There may also be costs that would be incurred by the business even if a particular segment is eliminated. These cost considerations are important if a business is considering streamlining its operations and eliminating certain segments.