Gross Margin Dropped From 50% to 35%. Here's What I'd Check First.

A 15-point gross margin drop is a big enough move that it's rarely explained by one small thing. Before jumping to conclusions, here's the order we actually check.

First: has anything moved between cost of goods sold and operating expenses? A miscategorized expense — something that should sit below the gross profit line landing above it instead — is one of the most common causes of a sudden, unexplained margin shift, and the easiest to fix once found.

Second: has pricing or discounting actually changed? It sounds obvious, but a promotional discount, a renegotiated contract, or a shift in customer mix toward lower-margin products can quietly move the average without anyone flagging it as a 'pricing decision.'

Third: has the cost side moved — supplier prices, freight, or input costs? Rising costs that haven't been passed through to price will compress margin even if revenue and volume look completely normal.

Fourth: is inventory being valued and counted correctly? An error in ending inventory valuation flows directly into cost of goods sold and can create a margin swing that has nothing to do with the actual business — purely a bookkeeping issue.

Only after ruling out these four do we start looking at genuine operational explanations, like a real shift in product mix or a structural change in the cost base. Starting with the numbers first — not the narrative — is what keeps the investigation honest.