Shocking Profit – Part 1 of 5 You’re Making Money in One Part of Your Business and Quietly Giving It Back in Another

By Tim Van Mieghem| Founding Partner | Author of Shocking Profit

This is the first in a five-part series on segmenting your business to drive real EBITDA and free up capacity you’re already paying for. This piece is about the four kinds of clarity segmentation delivers. The four articles that follow each take one of them and go deep. After 30 years of operational diligence on more than 500 companies, I can tell you the giveaway in your business is real, it’s sizable, and right now it almost certainly isn’t a decision anyone is making on purpose.

Picture a person standing with one foot in a bucket of boiling water and the other foot in a bucket of ice. On average, his feet are perfectly comfortable.

That’s your business on an income statement. The averages look fine. Margins are healthy, growth is steady, the bank is happy. And underneath that comfortable average, one foot is burning and the other is freezing. You are making good money in part of your company and quietly handing it back in another, and the blended number on the bottom line hides the whole thing from you.

Here is the part that should get your attention. Today, the decision to give that profit back is almost certainly not a conscious one. Nobody on your team decided to lose money on small customers or to pile cash into inventory you’ll never sell. It happened the way water finds a crack. Slowly, quietly, one reasonable-sounding yes at a time.

And here’s why the average feels so comfortable. That comfortable-on-average feeling has a specific cause: you don’t actually run one business. You run two very different ones under a single roof, a single income statement, and a single set of policies, and the blended number makes them look like one. The burning foot and the freezing foot are two different businesses. You have a set of twins that look identical and behave nothing alike. One twin is a high-volume, predictable, well-priced machine. The other is a low-volume, lumpy, underpriced headache. Manage them as one child and you will overfeed one and starve the other, every single day, while the average smiles back at you and says everything’s fine. Let me show you how to see them apart.

Why are your averages lying to you?

Every owner I meet can tell me their overall gross margin. Very few can tell me their margin on small customers versus large ones, or on their simple products versus their complicated ones. And that gap, between the average you know and the segments you don’t, is exactly where the money hides.

I’ll make this concrete with a company we worked with. To keep them anonymous, I’ll call them Uniform Advantage, a maker of custom apparel. Good business, strong brand, healthy 70-plus percent gross margins. By every average on the financials, they were thriving. Their executive team described their pricing strategy to me, and it was beautiful. Elegant. They spoke about customer size, strategic value, margin targets by product. A thoughtful answer.

Then we ran their actual gross margins, sorted by the size of the customer and the size of the product. Here, roughly, is what we found:

Look at what the averages were hiding. The smaller the customer, the lower the margin. The smaller the product, the lower the margin. The “elegant” pricing strategy was a story the executives told themselves. In practice, pricing was set by whichever salesperson was in the room, and the smallest customers buying the smallest items were the ones quietly bleeding margin. A strategy you can describe but cannot see in your own data isn’t a strategy. It’s a hope.

That’s the lie of the average, and segmentation is how you catch it. Albert Einstein is supposed to have said we should make things as simple as possible, but no simpler. One blended margin number is too simple. It will lie to you every time.

What does it actually mean to segment a business?

Let me get the soapbox out of the way, because you already know the principle in your bones.

I have identical twin nieces. Same genes, same parents, same house, same brother they both find equally annoying. And they could not be more different. One follows every rule, one is endlessly social, and if I’m told one of them is home on a Friday night, I know exactly which one it is. Nobody would try to parent those two girls the same way. If you can’t treat two identical kids as if they’re the same, you certainly can’t treat all your customers and all your products as if they’re the same either.

That’s the real revelation segmentation delivers, and it’s worth saying plainly: you almost always have a factory within your factory, a business within your business. Identical-looking twins that need completely different handling. Once you see them as separate, the four kinds of clarity below are simply the four places that split shows up.

Segmenting is just refusing to lump everything into one pile. You take your customers, your products, your orders, and you sort them by what they truly earn and what they truly demand of you. Then you look at the groups and ask which ones don’t belong where you’ve been treating them.

To do that sorting in a rigorous way, we use a tool we built called the 9-Box. You don’t need its machinery to follow this series, but you should know what it is, because it’s the window we look through. The 9-Box sorts your business along two axes at once, which gives you a three-by-three grid, and the second axis is where the truth lives that a single ranking always hides.

Why two grids instead of one?

The 9-Box shares one axis across two companion views, and each view answers a different question. Together they show you the whole picture.

The shared axis is Volume, your A, B, and C items ranked by cost of goods. Your A items are the vital few the business runs on. Your B items are the middle. Your C items are the long tail of small sellers, and there’s usually a fourth bucket, the D items, with essentially no demand at all. Almost every owner is stunned by the shape of this. At Uniform Advantage, 43 products, under two percent of their active items, drove well over half their sales. The tail was enormous and it cost a fortune to carry.

Then we run that Volume axis two ways:

The first grid is Volume by Volatility. Volatility just means how much the demand for something bounces around week to week. Some products sell like a metronome, steady and predictable, and you can plan them and run them lean. Others lurch, ninety units one week and zero the next three, and you can’t plan them, so you smother them in inventory. This grid is the story of predictability and inventory. It separates the margin you can count on from the margin that’s fragile.

The second grid keeps Volume but swaps in Customer Size, sorting your A customers, B customers, and C customers by how much they buy. This grid is the story of who and risk. It shows whether your big products flow through a few big customers or a swarm of small ones, where you’re pouring A-level service onto C-level accounts, and where a “great” product secretly depends on a single customer who could walk.

You need both. A product can look like a crown jewel on the first grid, high volume, beautifully predictable, and then the second grid reveals every unit flows through one giant customer. Your safest product is actually your biggest concentration risk. One grid keeps you honest about your cash and your operations. The other keeps you honest about your customers and your risk.

One more idea worth a name. When we read these grids, we watch a measure we call Turn & Earn: is this segment earning a fair return on the cash you have tied up in its inventory? You don’t need the formula. You need the question, because the cash in your inventory is your cash, parked on a shelf, and most owners have never once asked whether it’s working or just sitting there.

What four kinds of clarity does segmentation give you?

This is the heart of the series. Read your two grids honestly and four kinds of clarity emerge, each worth real money. I’ll spend a full article on each. Here’s the map, and I’ll use Uniform Advantage to make each one real, because that one company showed all four at once.

Clarity 1: Where you make money, and where you give it back

This is the big one. The grids expose the customers and products you’re treating like A’s when they earn like C’s. At Uniform Advantage, the large A-customer corner of the business threw off healthy operating margins. But once we loaded the real cost to serve, the small-customer corner of the long tail was running at a negative operating margin. They were paying for the privilege of those sales and didn’t know it. That’s not a people failure. It’s a system that never told anyone the truth. Article 2.

Clarity 2: Where you’re priced below what the customer expects

Here’s the sharper way to think about pricing. The test isn’t whether a customer would be happy to pay more. Nobody’s happy to pay more. The test is whether they’d be surprised to. Uniform Advantage charged the same price to large and small customers, to wealthy neighborhoods and struggling ones, to high-volume and one-off products. A modest, careful increase on just the B and C items added over $170,000 in pure margin, no extra work, no lost customers. Article 3.

Clarity 3: What your excess inventory is warning you about

Inventory piled in the wrong boxes is a canary in the coal mine. It’s not the disease, it’s the warning light pointing at a broken process upstream. Uniform Advantage had quietly built up more than $3.7 million in inventory that needed to be written off, accumulated over a decade at three to five hundred thousand dollars a year. Nobody set out to do that. Unreliable planning and a habit of building ahead did it, one reasonable batch at a time. Article 4.

Clarity 4: How much inventory you really need

Once you can read the grid, you can set a smart, differentiated inventory policy instead of one blanket rule. The same business carrying over $4 million in inventory turned out to need closer to $1.8 million once we set stock levels segment by segment, lean where demand was predictable, buffered where it was genuinely lumpy, and cut hard on the dead long tail. That gap is cash, and the floor space it frees is capacity you already own. Article 5.

Four kinds of clarity. Two grids. One tool. Unrecognized problems do not get solved, and undiscovered value does not get mined.

Why does this matter more now than ever?

Because if you don’t mine this value, your buyer will, and they’ll keep the difference.

And make no mistake, the value is real money, not a rounding error. Take the one company I’ve been describing. When we finished, the picture was concrete: over $170,000 a year in pure margin they’d been leaving on the table in pricing alone, a small-customer segment quietly running at a negative operating margin, and more than $2 million in cash trapped in inventory they didn’t need, the difference between the $4 million they were carrying and the $1.8 million the business actually required. Same plant, same people, same customers. The only thing that changed was that somebody finally looked. The size of that prize is not unusual. It’s typical.

Private equity firms are sitting on enormous amounts of capital waiting to be deployed, with an elevated $1.1 trillion in US dry powder and roughly $2.1 trillion globally heading into 2026 by most estimates, and broader measures of private capital running higher still. That capital has to find a home, and a great deal of it is hunting for exactly the kind of well-run, founder-owned company you may have built.

And the playbook those buyers run is not financial wizardry. It’s operations. Strategic and operational improvements continue to be among the largest sources of private equity returns. When a PE firm buys your company, one of the first things they do is segment it, find the giveaway, and pocket the EBITDA you left on the table. Then the math gets painful for the seller: companies sell for a multiple of earnings, so every dollar of EBITDA you could have captured before the sale gets multiplied into the buyer’s pocket instead of yours. A few hundred thousand in found margin isn’t a few hundred thousand at exit. It’s that, times the multiple.

You can do this work now, while the value still belongs to you. That’s the whole point of the series.

How do you read your own grids without drowning in data?

I can hear the objection, because I’ve heard it at a thousand conference tables: “Tim, I don’t have a data team. I can’t build this.”

You don’t need a perfect version. You need a roughly right one. My guiding principle here is simple: roughly right, not precisely wrong. You’re trying to spot the burning foot and the freezing foot, and you don’t need four decimal places to feel temperature.

Start simple. Rank your products by cost of goods and draw your A, B, and C lines. On your meaningful products, eyeball the week-to-week demand: steady, or lurching? Separately, rank your customers by what they buy and mark your A, B, and C accounts. You now have the bones of both grids, built from data you already have, with no new system.

Then do the thing the rest of this series will train you to do. Look. Ask which customers and products don’t belong where you’ve been treating them.

One caution that matters more than any technique. When the grid shows you something ugly, and it will, do not turn it into a weapon. The numbers are never an indictment of your people. If a segment looks bad, the system that produced it needs fixing, not the person living inside it. Truth is not a stone meant to hurl at people. Use what you find to fix the business, or your team will quietly stop showing you the truth, and then you really are flying blind.

Key Takeaways for PE Operating Partners

• The 9-Box runs as two companion grids on a shared Volume axis: Volume by Volatility (inventory, predictability, return on capital) and Volume by Customer Size (concentration, who’s over-served, where pricing has drifted).
• The two grids catch each other’s blind spots: a low-volatility “crown jewel” can hide single-customer concentration risk the volatility view alone never flags.
• The four clarities map straight to a Day-100 plan: SKU rationalization, pricing resets, inventory policy by segment, and make-to-stock versus make-to-order calls.
• Turn & Earn separates durable margin from fragile, the basis for both working-capital release and a defensible EBITDA story at exit.

Key Takeaways for Owner-Operators

• Your blended margin is the boiling-water-and-ice average. It feels fine and hides everything. Segmentation is how you feel each foot separately.
• You are almost certainly giving profit back somewhere right now, and it isn’t a decision anyone made on purpose.
• You can build a roughly right version of both grids from data you already have. Roughly right beats precisely wrong.
• Mine this value now, while it’s still yours. After a sale, every found dollar gets multiplied into your buyer’s pocket, not yours.
• When the grid shows you something ugly, fix the system, never blame the people.

Frequently Asked Questions

What does it mean to segment a business?

Segmenting means sorting your customers and products into groups based on what they truly earn and what they truly cost you to serve, instead of treating them as one undifferentiated pile. The point is to stop managing by blended averages, which hide where you make money and where you lose it. Just as you’d raise two very different children according to their needs, you manage different customers and products according to their economics. Done well, segmentation reveals profit, pricing, and inventory opportunities that a single bottom-line number completely conceals.

Why are average margins misleading?

Because an average blends your best and worst together into one comfortable-looking number, like a person with one foot in boiling water and one in ice who is, on average, comfortable. Your overall gross margin can look healthy while small customers, complex products, or unpredictable demand quietly lose money inside it. The blended figure gives you no way to see which parts of the business earn their keep and which drain it. Segmentation pulls the average apart so you can see, and fix, the parts that are actually burning.

What is the 9-Box analysis?

The 9-Box is a tool that sorts your business along two axes at once, producing a three-by-three grid. The vertical axis is Volume, ranking items A, B, and C by cost of goods. The horizontal axis is run two ways: once by Volatility (how predictable demand is) and once by Customer Size (whether large or small customers drive the sales). Each box reveals something a single ranking hides, such as fragile margin, concentration risk, or inventory sitting where it shouldn’t. It turns a vague sense that “something’s off” into a specific, quantified picture of where.

How much profit are most companies giving back?

It varies, but it’s almost never zero, and it’s rarely small. In company after company, we find small customers and long-tail products running at little or negative margin once the real cost to serve is counted, pricing that hasn’t kept pace with the value delivered, and inventory quietly absorbing cash. The giveaway hides because it’s spread across thousands of transactions and buried under a healthy average. The first time an owner sees it laid out by segment, the reaction is usually some version of “how did I not know this?” You didn’t know because nothing was built to show you.

Should I do this before selling my business?

If you’re considering an exit, yes, and the math is the reason. Buyers run this exact analysis after they acquire you, capture the EBITDA you left behind, and keep it. Because companies sell for a multiple of earnings, every dollar of found EBITDA can translate into several dollars of enterprise value, and you’ll want that value in your pocket, not your buyer’s. Doing the work beforehand also lets you walk into a sale with a clearer, more defensible story about why your margins are what they are, which itself supports a stronger valuation.

One foot in boiling water

Come back to that person standing with one foot in the ice and one in the boiling water, perfectly comfortable on average. That’s your company on a blended income statement. It feels fine. And it’s the most expensive feeling in business, because comfort is exactly what keeps you from looking. The truth that comfort is hiding is that you don’t have one business. You have twins that look identical and run nothing alike, one hot, one cold, and you’ve been raising them as a single child.

The four articles ahead will teach you to feel each foot separately. To see where you make money and where you hand it back, where you’re underpriced, what your inventory is trying to tell you, and how much of your cash and capacity you can take back. So which part of your business is burning while the average tells you everything’s fine? Go find out. There’s more profit and more capacity sitting in that answer than in almost anything else you’ll do this year.

If you’d like to see what this looks like inside your own operation, that’s what we do at The ProAction Group. The consultation isn’t free, but the conversation is, and we can tell you whether segmentation can help your business and how. Call us at (312) 726-6111.