Many companies respond to margin pressure by pushing harder: more volume, more projects, more revenue. Yet for a growing number of businesses, this reflex is precisely what keeps profitability under pressure.
When costs structurally rise faster than revenue, restoring profitability often requires a counter-intuitive move: deliberately stepping back, in both revenue and costs, before moving forward again. Breaking free from the “fixed cost fallacy” is a prerequisite. The “Inverse Bathtub Curve” provides a powerful and practical lens to identify where value is created, diluted or destroyed, and which levers truly move EBITDA.
Understanding the profitability squeeze
For many companies, profitability has deteriorated because costs have increased faster than revenue. Rising energy and raw material prices, higher labour costs and disrupted supply chains have driven (significantly) higher Costs of Goods Sold (CoGS) and Operating Expenses (OpEx). At the same time, competitive pressure and demand elasticity have limited the ability to pass these increases on to customers one-for-one. The result: declining EBITDA margins, particularly where revenue underperforms against budget while OpEx remains largely fixed.
To understand the combined impact of rising costs and lagging revenue on EBITDA, it is helpful to construct an “Inverse Bathtub Curve”. In this chart, cumulative gross margin (revenue minus CoGS) is plotted against cumulative revenue across orders, projects or customers, ranked from high to low gross margin. Total OpEx is then overlaid, with the gap between cumulative gross margin and OpEx representing EBITDA. Comparing this relationship across two different years provides a clear and visual explanation of declining profitability.
Image 1: Inverse Bathtub Curve – Potential causes of decreased EBITDA
The chart is referred to as the “Inverse Bathtub” because of its characteristic shape: a relatively small share of revenue typically generates a disproportionate share of gross margin (the steep left-hand side), a large share delivers modest margins (the flatter middle section), and a final tail may even destroy value by generating negative gross margins (the declining right-hand side). Its strength lies in making trade-offs explicit. In one view, it shows which part of the revenue base funds the organisation, which part merely keeps it busy, and which part actively erodes value.
Stepping back to regain control
In a combined revenue-and-cost squeeze, the most effective approach is often — alongside meaningful price increases for low-margin customers and orders — to deliberately reduce both revenue and costs first, and only then return to growth focused exclusively on healthy-margin revenue.
Many companies hesitate to implement significant price increases, reduce costs decisively or say “no” to structurally low-margin customers and orders. Yet in hindsight, executives frequently conclude that they intervened too little and too late.
When cost levels have structurally increased as a share of revenue, sustainable profitability improvement requires action on two fronts: low-margin revenue must be addressed, and OpEx must be reduced. The combined effect of these measures is illustrated in the second figure below.
Image 2: Inverse Bathtub Curve – Measures for improving EBITDA
The first step is to increase prices, particularly for low-margin customers. Companies often assume this is not feasible. In practice, however, low-margin customers surprisingly often accept a reasonable adjustment. Customers benefiting from non-market-conform pricing are typically aware of this and may even anticipate an increase, provided it remains within reasonable bounds.
If some low-margin customers do not accept the new minimum pricing, it can be rational to let them go. These customers contribute little to covering operating costs. Crucially, operating costs must then be reduced in line with the lower revenue and gross margin to limit the impact on EBITDA.
Breaking the Fixed Cost Fallacy
In practice, many companies are cautious and reluctant when it comes to reducing operating costs, especially personnel-related costs and redundancies. This behaviour reflects the “fixed cost fallacy”: the tendency to maintain a cost base based on past investments of time and money, rather than on realistic expectations of future value.
A common argument is that revenue is expected to grow, after which costs will “naturally” realign. Instead, we typically observe one of three outcomes —all detrimental to long-term profitability:
- Revenue does not grow (sufficiently), leaving operating costs structurally too high
- Revenue is chased at overly aggressive prices to cover operating costs, eroding percentage gross margin
- Revenue does grow, but operating costs increase in parallel, keeping the cost base disproportionately high
To enable healthy and profitable growth, companies therefore need to reset their operating cost base first. How far costs, and consequently revenue, can and should be reduced depends on several factors, including:
- The variability of operating costs. Indirect labour costs can often be scaled down relatively easily, whereas housing costs typically cannot
- The share of revenue that generates little to no gross margin, or at least insufficient margin to cover a fair share of operating costs
- The absolute gross margin still generated by underperforming orders or customers, and therefore how much contribution to operating costs would be lost if this revenue disappears
- The concentration of low-margin revenue among a limited number of customers or projects, and the feasibility of selectively letting go of part of this underperforming revenue
Reset First, Then Grow Selectively
Once low-margin customers have been addressed through price increases or by declining further business, and operating costs have been realigned with the remaining revenue base, a new starting point emerges.
From there, companies can pursue selective growth focused exclusively on well-performing orders and customers. As revenue grows, operating costs can then increase — at most — proportionally, ensuring that EBITDA is preserved sustainably over time.
Improving profitability in structurally changed markets requires more than incremental optimisation. It requires the courage to reassess the revenue base, reset the cost structure and make explicit trade-offs.
At Argon & Co, we support organisations in applying the Inverse Bathtub analysis to their own portfolio, identifying where value is created or destroyed, and defining a pragmatic roadmap to restore EBITDA structurally. If margin pressure persists despite growth initiatives, it may be time to take a step back before moving forward again.
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