How to find which products are draining your margin
If your prices haven't moved in two years but your costs have, some products are almost certainly selling at a loss — you just don't know which ones yet. The fix is a product-level margin audit that separates true contribution margin (revenue minus every cost that touches that product) from the blended average that hides the damage.
Why blended margins lie to you
Most owners watch their overall gross margin and feel reasonably comfortable — until they don't. The problem is that a blended margin averages your winners and your losers together. A handful of high-margin products can quietly subsidise a growing list of products you're shipping at a loss. The number looks acceptable; the underlying reality isn't.
A two-year price freeze almost always means this is happening to you. Input costs, shipping carrier rates, packaging materials, payment processing fees, and marketplace commissions have all moved — some significantly. Your prices haven't.
Build a true cost stack for each product
The goal is to know, for every SKU, what you actually keep after every cost that product generates. Work through these layers:
1. Cost of goods (COGS) Start with your landed unit cost — purchase price plus inbound freight, duties, and any prep fees. If your supplier raised prices, your old landed cost number is wrong.
2. Fulfillment and shipping Pick-pack-ship costs, carrier rates, and dimensional weight charges. This is where margin erosion is often steepest and least visible — carriers adjust rates annually and DIM weight rules can quietly inflate costs on bulky, light items.
3. Platform and payment fees Shopify transaction fees, Amazon referral fees (which vary by category, typically 8–15%), PayPal or Stripe processing, and any app subscription costs allocated per order. These compound as volume grows.
4. Returns and shrinkage Model a realistic return rate by product category. A 15% return rate on a $40 item with a $6 return shipping cost changes the math meaningfully.
5. Allocated overhead Divide shared costs — storage, software subscriptions, any staff time directly touching fulfilment — across your SKU count or by volume. Even a rough allocation surfaces products that consume more overhead than they earn.
Once you stack these against your selling price, you get contribution margin per unit: the real number that tells you whether a product is funding your business or draining it.
Rank your SKUs by contribution margin, not revenue
Sort every product by contribution margin per unit (and total contribution margin if volume varies). You will almost always find three groups:
- Anchors: High margin, solid volume — protect these, price them confidently.
- Tweeners: Positive but thin margin — a price adjustment or cost renegotiation often rescues them.
- Drains: Negative or near-zero contribution — you are paying to fulfil these orders. Discontinue, reprice, or find a lower-cost source.
The drain category is almost always larger than owners expect, and it grows quietly during periods of price stability.
What to do with what you find
Reprice first. For tweeners and drains, run a price sensitivity check — small increases on products with loyal repeat buyers often hold without volume loss.
Renegotiate second. If volume justifies it, take your cost-stack data to suppliers. Hard numbers open conversations that "we'd like a better deal" doesn't.
Rationalise third. Products with no path to positive contribution margin tie up cash, storage, and attention. Cutting them frees all three.
Review quarterly, not annually. Costs don't wait for your calendar. A live, SKU-level margin view — updated as supplier invoices and carrier rates change — means you catch the next squeeze before it becomes a crisis.
This is the kind of ongoing product economics work that separates businesses that grow margins intentionally from those that discover problems at year-end. At SGML Accounting, product-level profitability analysis is a standard part of how we work with e-commerce clients — because knowing your numbers at this level is what turns financial reporting into a genuine decision-making tool.
Frequently asked questions
How often should I recalculate product-level margins?
Quarterly is a practical minimum. Carrier rate changes, supplier price adjustments, and platform fee updates happen on their own schedules — not yours. If you're buying inventory in USD and the exchange rate moves, that's an immediate trigger for a recalculation.
What's the difference between gross margin and contribution margin?
Gross margin typically subtracts COGS from revenue. Contribution margin goes further — it subtracts every variable cost directly tied to selling that unit, including shipping, platform fees, payment processing, and returns. Contribution margin is the number that tells you whether a product actually funds your business or costs you money to sell.
My bestselling product has a thin margin — should I cut it?
Not necessarily. High-volume, low-margin products sometimes justify their place by driving customer acquisition, building repeat purchase behaviour, or absorbing fixed overhead that would otherwise fall on better-margin SKUs. The question to ask is whether the contribution margin per unit, multiplied by volume, covers what that product costs the business in cash and attention — and whether you could redeploy that capital more profitably elsewhere.
Amazon fees are complex — how do I accurately model them per product?
Amazon's referral fee varies by category (typically 8–15% of the selling price), and FBA fees are based on unit size and weight tiers. Amazon provides a revenue calculator tool where you can model fees per ASIN. Run every SKU through it using your current selling price and dimensions, and update it whenever Amazon revises its fee schedule — which typically happens once or twice a year.
Do HST/GST implications affect product-level profitability calculations?
For the purpose of a margin analysis, you work in pre-tax figures — HST/GST collected is a flow-through liability, not revenue. However, input tax credits (ITCs) on your business expenses do affect your real cash position, so making sure your ITCs are being fully claimed is part of keeping your true cost base accurate.
General information only — not tax, accounting, or financial advice for your specific situation.