Thermoelectric generators (TEGs) possess the ability to generate electrical power from heat. As TEGs are operated under a thermal gradient, inhomogeneous material properties—either by design or due to inhomogeneous material degradation under thermal load—are commonly found. However, this cannot be addressed using standard approaches for performance analysis of TEGs in which spatially homogeneous materials are assumed. Therefore, an innovative method of analysis, which can incorporate inhomogeneous material properties, is presented in this study. This is crucial to understand the measured performance parameters of TEGs and, from this, develop means to improve their longevity. The analysis combines experimental profiling of inhomogeneous material properties, modelling of the material properties using a single parabolic band model, and calculation of device properties using the established Constant Property Model. We compare modeling results assuming homogeneous and inhomogeneous properties to the measurement results of an Mg2(Si,Sn)-based TEG prototype. We find that relevant discrepancies lie in the effective temperature difference across the TE leg, which decreases by ~10%, and in the difference between measured and calculated heat flow, which increases from 2–15% to 9–16% when considering the inhomogeneous material. The approach confirms additional resistances in the TEG as the main performance loss mechanism and allows the accurate calculation of the impact of different improvements on the TEG’s performance.