How to Calculate True Product Profitability (It’s Not What You Think)
Let me ask you a question:
Do you know which of your products is actually making you the most money?
Most DTC founders think they do. They check their Shopify dashboard, sort by sales volume or gross margin, and assume those are their heroes.
But that data lies.
Why Gross Margin Isn’t Enough
Gross margin is only the first layer of profit. It tells you:
- Revenue - COGS = gross margin
But it doesn’t account for:
- Paid ads to acquire that customer
- Return/refund rates per SKU
- Discounting patterns
- Packaging, shipping, or storage costs
- Customer support time per product
That’s why a high-margin SKU can still lose money.
Introducing: Contribution Margin
Contribution margin = [Product Revenue - Variable Costs] / Product Revenue
It shows how much profit each product contributes to the business after all associated variable costs.
Let’s say:
- Product A sells for $80
- COGS = $30
- Ad cost per sale = $20
- Returns = 10% of orders = $8 cost avg
- Packaging & fulfillment = $5
Gross Margin = $80 - $30 = $50 Contribution Margin = $80 - ($30 + $20 + $8 + $5) = $17
Now imagine scaling Product A with paid ads, thinking it’s your hero. You could be bleeding cash.
Where Profit Really Hides
When we audit DTC brands, we usually find that:
- 20% of SKUs drive 80% of actual profit
- Some bestsellers have negative contribution margin
- Bundles often outperform standalone products
Knowing this lets us:
- Kill unprofitable SKUs
- Reallocate ad spend
- Build bundles around top earners
- Adjust pricing based on real margins
How to Start Tracking This
You don’t need a full data team. Start with:
- Pull SKU-level sales, returns, and discounting
- Map average CAC per product if possible
- Include fulfillment, support, and packaging costs
- Calculate per-unit profit across all channels
Even rough estimates are better than flying blind.
The Real Power of Profit Mapping
With visibility, one of our clients removed 6 SKUs, redirected ad spend to 3 products, and grew monthly profit by 28% — without changing revenue.
Final Thought
Gross margin is what looks good on a spreadsheet.
Contribution margin is what keeps you in business.