Gross margin is what remains after product cost; it does not show what the company earns after acquiring, delivering,…
Gross margin is what remains after product cost; it does not show what the company earns after acquiring, delivering, returning and servicing an order. Two SKUs with the same margin rate can fund very different return, commission, support or promotion costs. Manage each product on contribution after service per unit and period, separating variable, avoidable, common and fixed costs before withdrawing it or increasing investment.
Decision and method.
Increase, correct or remove a SKU from its served contribution and its portfolio interactions, never from gross margin alone. Reconcile net sales after discounts, credits, taxes and cancellations, using the same units and periods as costs. Subtract product cost, logistics, returns, payment, service, commission and acquisition under documented allocation rules; show uncertain costs as a range. Estimate basket, recruitment and substitution separately through an experiment or dedicated analysis. Then distinguish a price rise, cost reduction, channel limit, redesign, withdrawal or strategic retention; test avoidable cost and expected transfers before removal.
Worked example.
SKU B sells for €150 with €60 product cost. Per unit it bears €15 returns, €18 service, €25 channel cost and €20 acquisition, on 700 units. Gross margin is 150 − 60 = €90, or 60%. Served contribution is 150 − 60 − 15 − 18 − 25 − 20 = €12, or 8%. Total contribution is 700 × 12 = €8,400, versus €24,000 for SKU A and €18,600 for SKU C. Do not remove B immediately: restrict costly channels, reduce support and test a higher price; withdraw it if contribution stays below €20.
Checks and limits.
Net sales and costs use the same unit and period; every allocated cost is variable or avoidable with a documented rule; basket and recruitment effects remain separate; withdrawal compares lost contribution, avoided costs and expected transfers. Service time can be badly measured. Portfolio effects need their own identification. Historical contribution does not automatically predict response to a new price.
Resources and sources.
Download the SKU margin cascade. Related: rationalise the portfolio, measure transfers, calculate channel cost. Sources: Shapiro et al. (1987); Kaplan and Cooper (1998); Farris et al. (2010).