DEFINITION of Margin Creep
Margin creep has multiple meanings in finance. In both of the cases, margin creep refers to a slow reduction over time of a company's overall profit margin. A product's margin is the difference between the cost of the good or service and the retail price. The greater the difference between the cost of the good sold and the price at which it is sold, the higher the margin.
1) Margin creep can refer to a gradual erosion of a company's profit margins over time. Often, this can be due to increasing costs incurred by the company without increases in price that cover the increased cost of the good sold.
2) Margin creep refers to the behavior of a company that chooses to focus only on the high-end, high-margin products, even if customers show an inclination towards more value-oriented products and/or services. By focusing all or most of its efforts on the high margin products, the company may lose market share of the value priced, lower margin products, thus reducing its overall sales and potentially reducing the company's total profit margin.
BREAKING DOWN Margin Creep
Margin creep refers to the gradual reduction of a company's profit margins over time. The tendency for margin creep within a company can have long-term implications on its sustainability.
1) Companies will often eat increases in costs for the inputs to their products in order to avoid raising the price of their end product. They are concerned that if other companies are not raising their prices as well, customers will be driven towards substitute goods and the company will lose market share. This tendency to absorb price increases can lead to margin creep. It is most common in companies who produce products for which there is an elastic consumer demand, meaning that the amount of a product purchased by a consumer is heavily influenced by changes in the product's price.
2) While any products or services that are successfully marketed and sold may result in a solid margin, other potential sales will be lost if value-minded consumers are price-sensitive.