How do you do SKU profitability analysis?

Your best-selling SKU may be losing money. SKU profitability analysis ranks each product by contribution margin: revenue minus cost of goods, shipping and fulfilment, payment and platform fees, returns and ad spend. Use at least 90 days of order-level data, rank by contribution in currency, then protect, grow, fix or cut each SKU based on its pattern.

What is the difference between SKU profitability and product profitability?

SKU profitability looks at each sellable variant, while product profitability groups variants, for example all sizes of one hoodie. Start at SKU level, then roll the results up to products and categories.

How much data do I need?

At least 90 days of orders. Use a full year if sales are seasonal, and wait for a few weeks of sales before judging a new SKU.

What is a good SKU margin?

There is no universal figure. Every SKU should have a positive contribution margin, and the catalogue as a whole must cover your fixed costs. The break-even calculator shows the level you need.

How do I allocate ad spend to SKUs?

Assign it directly when a campaign promotes one SKU. For store-wide campaigns, split it by each SKU's share of attributed revenue or orders, and use the same rule every period.

How to Do SKU Profitability Analysis (With Example)

Revenue by product tells you what sells, not what earns. A SKU can lead your sales chart and still cost more to ship, advertise and refund than it brings in.

SKU profitability analysis answers a different question: after every cost that varies with the product, how much does each SKU contribute? This guide shows how to calculate SKU margin step by step, with a worked example, and what to do once you can see which products are your real winners.

What SKU profitability analysis measures

SKU profitability analysis ranks each product by the money it leaves after its own variable costs. Three margins are in common use, and only one of them should decide whether you keep selling a SKU.

Gross margin: revenue minus cost of goods. It ignores shipping, fees, returns and ads, so it flatters almost every SKU.
Contribution margin: revenue minus all variable costs, meaning cost of goods, shipping and fulfilment, payment and platform fees, returns and ad spend. This is the SKU contribution margin, and the number to rank on.
Net margin: contribution margin minus fixed costs such as salaries and rent. Fixed costs are hard to assign fairly to one SKU, so leave them out at product level.

In formula form:

Contribution margin % = (Revenue – COGS – Fulfilment – Fees – Returns – Ads) ÷ Revenue

A SKU also has to cover its share of fixed costs before the business makes a profit. The break-even calculator shows how much contribution you need overall.

How to do SKU profitability analysis, step by step

Build the analysis from order-level data, then roll the costs up to each SKU.

Choose the period. Use at least 90 days, longer if sales are seasonal, so one promotion or stock-out does not distort the result.
Export sales by SKU. Pull units, revenue and discounts for each SKU from your store or marketplace. Treat size and colour variants as separate SKUs when their cost or return rate differs.
Add cost of goods. Use landed cost: the product price plus freight, duties and packaging. A supplier price alone understates it.
Add shipping and fulfilment. Use actual carrier and warehouse costs per order, and split them across SKUs by units or weight when an order holds several.
Add payment and platform fees. Apply each channel's real rates, including marketplace referral and fulfilment fees.
Add returns. Count refunded revenue, return shipping and stock you cannot resell. Returns can quietly erase the margin on a SKU.
Allocate ad spend. Assign spend directly when a campaign promotes one SKU. For store-wide campaigns, split it by each SKU's share of attributed revenue.
Calculate contribution margin per SKU. Show it in currency, as a percentage of revenue and per unit.
Rank and review. Sort by contribution in currency first, then check margin percentage and volume.

A spreadsheet is enough to start. The hard part is getting clean cost data per order, not the formulas.

Worked example: five SKUs, one surprise

In this illustrative month, the SKU that sells the most units loses money. Figures are in your currency; costs are shown as positive numbers and subtracted from revenue.

SKU	Units	Revenue	Cost of goods	Shipping, fulfilment, fees	Returns	Ad spend	Contribution	Margin
Classic tee	1,000	30,000	9,000	4,900	1,200	6,000	8,900	29.7%
Hoodie	400	28,000	9,600	3,240	3,000	9,000	3,160	11.3%
Canvas bag	2,500	30,000	15,000	8,400	300	8,000	-1,700	-5.7%
Premium jacket	150	27,000	10,500	2,010	2,700	4,500	7,290	27.0%
Socks 3-pack	800	12,000	3,200	2,760	100	1,000	4,940	41.2%
Total	4,850	127,000	47,300	21,310	7,300	28,500	22,590	17.8%

Three things stand out:

The canvas bag sells 2,500 units and loses 1,700. Its gross margin is 50%, but fulfilment and ads consume all of it.
The hoodie looks healthy on revenue but earns only 11.3%. Returns and ads take 12,000 of its 28,000 in sales.
Socks earn the highest margin, 41.2%, on the smallest ad budget.

Ranked by revenue, the tee and the canvas bag tie at the top. Ranked by contribution, the tee leads, the jacket is second and the bag is last.

What to do with the results

Match the action to the pattern, not only to the margin percentage.

Pattern	What it usually means	Action
High margin, high volume (classic tee)	Core earner	Protect it: keep it in stock and avoid heavy discounting
High margin, low volume (socks, jacket)	Under-promoted winner	Grow it: move ad budget and stock here first and test cross-sells
Low margin, high volume (canvas bag)	Revenue without profit	Fix it: raise the price, bundle to cut fulfilment cost per unit, reduce ads or renegotiate cost of goods
Margin eroded by one cost line (hoodie)	A single problem, such as returns or ads	Fix that line: improve sizing guidance, product pages or ad targeting
Negative contribution with no fix	The SKU costs more than it earns	Cut it, or keep it only with a clear purpose such as a loss-leader

Re-run the analysis after each change and at least quarterly. Winners need stock, and stock ties up cash, so read the result alongside How Inventory Kills Cash in DTC Businesses and your 13-week cash flow forecast.

Mistakes that distort SKU margin

Most wrong answers in SKU profitability analysis come from a few shortcuts.

Ranking by gross margin. It ignores shipping, fees, returns and ads, which is where many SKUs lose money.
Spreading ad spend evenly. Equal splits reward heavily advertised SKUs and hide the real winners.
Ignoring returns. Refunds, return shipping and unsellable stock can erase a SKU's margin.
Using supplier price instead of landed cost. Freight, duties and packaging belong in cost of goods.
Judging a single month. Promotions, stock-outs and seasonality distort short windows.
Treating variants as one SKU. Sizes and colours often have different return rates and costs.
Cutting before checking repeat purchases. A low-margin SKU that brings customers back to buy high-margin ones may deserve to stay.

Next steps

Run the analysis on your last 90 days, then act first on the SKU where the gap between revenue rank and contribution rank is largest. Three ways to go further:

See how we approach it in SKU profitability and our wider unit economics work.
Check what your ad spend really returns with the true ROAS calculator, and try the Health Check.
If you want a finance lead to run this every month, see fractional CFO for e-commerce.