Product margin: moving from gross margin to served contribution.
Key distinctions
Three conditions before calculating.
Attributable costs
A cost is charged to the SKU if it varies with its sale, its channel, its return or its need for service. Common unavoidable costs stay separate to avoid artificially condemning a reference.
Rate and amount
A high margin percentage on a small volume can create less value than a weaker but stable reference. The rate serves to compare unit economics; the amount serves to arbitrate the portfolio.
Portfolio interactions
An entry product can recruit, a loss leader can generate a basket and a complex reference can protect a contract. Those effects must be proven and presented separately from the direct contribution.
Method
Building a contribution account usable for each decision
- 01Reconcile price and volume
Start from net sales after discounts, credit notes, taxes and cancellations; align units, orders and periods before matching the costs.
- 02Stack the costs
Subtract product cost, logistics, return, payment, service, commission and acquisition according to documented rules; present uncertain costs with a range.
- 03Add the indirect effects
Estimate basket, recruitment and substitution through an experiment or a dedicated analysis; do not automatically attribute the whole basket value to the entry product.
- 04Choose the action
Differentiate a price increase, a cost reduction, a channel restriction, a redesign, a stop or a strategic hold; test the avoidable cost and the transfers before removal.
The contribution cascade by SKU
Price, product cost, returns, service, channel and acquisition are stacked to reveal the references whose gross margin overstates the value.
SKU A
Price €100€24SKU B
Price €150€12SKU C
Price €250€93SKU B drops from 60% gross margin to 8% served contribution.
CSVDownload the SKU margin cascade↓SKU B shows 60% gross margin but only 8% contribution
SKU B is sold at €150 with €60 of product cost. Per unit, it carries €15 of returns, €18 of service, €25 of channel and €20 of acquisition. Its volume is 700 units.
Gross margin: 150 − 60 = €90, that is 60%. Served contribution: 150 − 60 − 15 − 18 − 25 − 20 = €12, that is 8%. Total contribution: 700 × 12 = €8,400, against €24,000 for SKU A and €18,600 for SKU C.
SKU B is not withdrawn immediately. It moves to priority correction: restriction of expensive channels, reduction of support and a test of a higher price, with a stop if the contribution stays below €20.
Acceptance conditions
What must be true to act.
- 01
Net sales and costs share the same unit and the same period.
- 02
Every charged cost is variable or avoidable and its rule is documented.
- 03
Basket and recruitment effects are presented separately.
- 04
A removal compares lost contribution, avoided costs and expected transfers.
Limits
What this analysis does not prove.
- Service costs can be badly measured if time is not tracked.
- Portfolio effects require a specific identification.
- A historical contribution does not automatically predict the response to a new price.
References
Works cited.
- Shapiro, B. P., Rangan, V. K., Moriarty, R. T. & Ross, E. B. (1987), “Manage Customers for Profits”, Harvard Business Review.
- Kaplan, R. S. & Cooper, R. (1998), Cost & Effect: Using Integrated Cost Systems.
- Farris, P. W., Bendle, N., Pfeifer, P. & Reibstein, D. (2010), Marketing Metrics.