What it means
The term comes from economics, where it was first used to describe the gap between the prices farmers received and the prices they paid for manufactured goods. Today it is used more broadly for any pair of prices that are meant to move together but do not.
The blades of the scissors are the two price lines, and the gap between them is the problem. In a company, the most common scissors is between input costs and selling prices.
If raw materials, wages or hosting fees climb by 25% while customers will only accept a 4% price rise, the margin is being cut from both sides. A manager who only watches revenue growth can miss it, because sales can look healthy while profit quietly shrinks.
Scissors appear when a business has limited power to pass costs on. Long fixed-price contracts, powerful customers, regulated tariffs and intense competition all stop a firm from raising prices when its own bills rise.
The same pattern can run the other way, for example when a buyer's selling prices rise faster than the costs of the supplier who sets its price once a year. To measure it, analysts rebase both price series to 100 at a starting date and watch the gap between the two index lines.
Rebasing makes unlike things comparable, such as barrels of oil and boxes of finished goods. The widening gap shows how fast the margin is being eroded.
The usual responses are to renegotiate contracts, add cost-linked clauses, hedge the input price, redesign the product or move up the value chain. None of these is instant, which is why the earlier the scissors is spotted, the more options remain.
Ignoring it tends to end with a forced price rise at the worst possible moment.
In practice
Real-world examples.
Example
A wheat farmer sees the price per tonne fall 10% over two seasons while fertiliser, fuel and machinery repair costs rise by a fifth. Revenue per hectare is lower and costs per hectare are higher, so the farm's profit shrinks at both ends.
Example
A bakery supplies bread to a supermarket on a contract that fixes the price for twelve months. Flour and energy costs jump mid-year, and the bakery has to absorb them until the next negotiation, which turns a comfortable margin into a thin one.
Example
A software company sells annual subscriptions worth $1,000,000 at a locked price, while its cloud hosting bill rises 15% from $200,000 to $230,000. Hosting has moved from 20% to 23% of revenue, and every point is margin that has disappeared.
Formula
Calculation
Scissors gap = Selling price index - Input cost index, with both indices set to 100 at the start date.
Suppose a manufacturer sells a product for $100 and its input costs are $80 per unit in the base year, so both indices start at 100 and the margin is $20, or 20%. Three years later the selling price index has risen to 104, which means a price of $100 x 1.04 = $104. The input cost index has risen to 128, which means a cost of $80 x 1.28 = $102.40.
The scissors gap is 104 - 128 = -24 index points. The margin per unit is now $104 - $102.40 = $1.60, and $1.60 / $104 = about 1.5%. A margin that was 20% has nearly disappeared without any single dramatic event.Case study
Seen in the real world.
Harlow Crate Packaging is a fictional company that makes corrugated boxes for food producers. Its customers signed two-year supply agreements with fixed prices, and then the cost of recycled paper and energy rose sharply in the first year. The finance manager charted both price series as indices and showed the board a clear scissors shape.
The illustrative response had three steps: an energy and paper cost-pass-through clause in all new contracts, a hedge on part of the energy bill, and a push to sell premium printed boxes where customers cared less about price. Within eighteen months the gap between the two lines had narrowed, though it never fully closed.
The lesson in this fictional case is that the chart, not the profit statement, gave the early warning. By the time the annual accounts showed a weak margin, two years of cheap contracts were already locked in.
Watch out
Common mistakes.
- Watching revenue growth alone and assuming a growing top line means the business is healthy, when rising costs may be eating the margin.
- Comparing raw price levels instead of rebased indices, which makes it impossible to see which series is actually moving faster.
- Assuming a scissors will correct itself, when it can persist for years if the firm has no power to reprice.
Questions
People also ask.
Is a price scissors the same as a margin squeeze?
Very nearly: a margin squeeze is the result for the business, while the scissors describes the price movements that cause it.
Can a price scissors help a business?
Yes, if the business is on the favourable side, for example when its selling prices rise faster than its input costs and the gap widens in its favour.
How do I spot one early?
Plot your key input costs and your average selling price as indices from a common starting date, and review the gap every quarter.
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