Updated:
December 30, 2025
12 min
Your "Best-Sellers" Are Probably Destroying Your Business
Here's a statistic that should make every Australian ecommerce operator uncomfortable: 62% of SKUs aren't profitable. Not marginally underperforming. Not "needs optimisation." Actively losing money on every sale.
The kicker? Most business owners have no idea which products fall into that 62%.
They're staring at revenue dashboards, watching "best-seller" badges light up next to products that are quietly bleeding cash. They're celebrating top-line growth while contribution margin evaporates. And they're making inventory decisions, marketing investments, and pricing changes based on data that measures the entirely wrong thing.
This isn't negligence-it's structural blindness. The standard ecommerce tech stack wasn't built to show you the truth about product profitability. It was built to show you the vanity metrics that make you feel good about swiping your credit card for more ad spend.
For the typical Australian ecommerce business operating between $2M and $5M in revenue, this blindness represents six figures in annual profit left on the table. The 45% average gross margin, but the average net margin collapses to approximately 10% once you account for the variable costs that gross margin conveniently ignores-shipping, fulfillment, marketing, payment processing, returns.
That 35-percentage-point gap between gross and net is where fortunes are made or lost. And contribution margin is the only metric that actually illuminates what's happening inside it.
The Gross Margin Delusion: Why Revenue Leaders Lie About Profitability
Most ecommerce operators conflate gross margin with profitability. It's an understandable mistake-gross margin is simple to calculate, easy to benchmark, and universally available in your accounting software. It feels like the right metric.
It's not.
Gross margin tells you what's left after subtracting the cost of goods sold from revenue. For an Australian retailer selling a $100 product that costs $40 to source, that's a comfortable 60% gross margin. Looks healthy. Looks like you're printing money.
But gross margin excludes every variable cost that actually matters in modern ecommerce:
Shipping and fulfillment. major operating expense for most ecommerce brands. When you're offering "free shipping" to compete with Amazon-and approximately three-quarters of the top 1,000 ecommerce retailers offer free shipping on at least some orders-those costs come directly out of your margin. For bulky or heavy products, shipping alone can consume 15-25% of the sale price.
Marketing and advertising. That $100 product didn't sell itself. You paid Meta or Google to put it in front of a customer. The cost of sales conversions for ecommerce marketers surged after iOS privacy changes, with some brands seeing acquisition costs increase by 155-200%. If you spent $30 to acquire that customer, your "60% gross margin" product just became a 30% contribution margin product.
Payment processing fees. Every transaction costs you 1.5-3% in payment gateway charges. For an Australian business processing through Stripe, PayPal, or Afterpay, these fees compound across every sale.
Returns and refunds. The fashion industry sees return rates of 20-40%. Every return doesn't just cost you the refund-it costs shipping, inspection, repackaging, and often a write-down on resale value. Returns transform profitable SKUs into margin destroyers.
Discounts and promotions. That 20% discount code you're running to drive volume? It's not coming out of thin air. It's coming directly out of contribution margin-often turning positive-margin products negative.
When you factor all of these variable costs into the equation, contribution margin reveals what percentage of each dollar actually contributes to profit. And for many ecommerce operators, that revelation is deeply uncomfortable.
Consider a real scenario: A skincare brand sells a serum for $89 AUD. COGS is $22 (75% gross margin-excellent!). But shipping costs $12, the customer acquisition cost was $28, payment processing took $2.67, and the product category sees a 15% return rate that costs an average of $8 per unit sold when amortised across all sales.
Actual contribution margin: $89 - $22 - $12 - $28 - $2.67 - $8 = $16.33, or 18.3%.
That "75% gross margin" product delivers an 18% contribution margin. Still positive-but a world apart from what the gross margin suggested. And that's a good scenario. Many products, when subjected to this analysis, reveal negative contribution margins that have been hidden for years.
The Profit Anatomy Protocol: A Framework for SKU-Level Truth
The standard advice for improving product profitability is worse than useless-it's actively misleading. "Focus on your best-sellers." "Double down on what's working." "Cut your lowest-performing products."
This advice assumes your data correctly identifies what's "best" and what's "working." It doesn't.
What you need instead is a systematic framework for calculating true product profitability at the SKU level. I call this the Profit Anatomy Protocol-a structured methodology that strips away vanity metrics and exposes the contribution margin reality of every product in your catalogue.
The Protocol operates on three core principles:
Principle 1: Every cost that varies with sales volume belongs in contribution margin.
This sounds obvious, but implementation is where most businesses fail. Variable costs in ecommerce extend far beyond COGS. They include marketing spend (allocated by product or campaign), shipping and handling, payment processing fees, marketplace commissions, packaging materials, pick-and-pack labour (if using 3PL), and return-related costs.
If a cost increases when you sell more of a product, it's variable. If it stays the same regardless of sales volume, it's fixed. Only variable costs go into contribution margin.
Principle 2: Allocation methodology determines accuracy.
32% of active SKUs generated zero revenue-meaning money is being burned on products that don't sell or convert. This statistic is only visible when you properly allocate marketing spend to individual products.
The challenge: most marketing spend isn't neatly attributable to a single SKU. A brand awareness campaign benefits your entire catalogue. A category-level Facebook ad drives traffic to multiple products. How do you allocate these costs?
The Profit Anatomy Protocol uses weighted allocation based on attributed revenue. If a campaign generated $10,000 in total attributed revenue, and Product A contributed $2,000 of that, Product A absorbs 20% of the campaign cost. This isn't perfect-no allocation method is-but it provides a reasonable approximation that's infinitely better than ignoring marketing costs entirely.
Principle 3: Contribution margin must be calculated at the transaction level, then aggregated.
Average-based calculations hide critical variance. A product might show a 25% average contribution margin while actually delivering 40% margins on some orders and -15% margins on others (due to heavy discounting, expensive shipping destinations, or returns).
The Protocol calculates contribution margin for every individual transaction, then aggregates upward. This granularity reveals patterns that averages obscure: which customer segments generate the highest margins, which shipping zones destroy profitability, and which promotional mechanics cost more than they deliver.
Implementing the Protocol: The Contribution Margin Calculator
To apply the Profit Anatomy Protocol, you need a systematic calculator that captures every relevant cost category. Here's the framework:
Step 1: Establish your cost architecture
For each product, document:
COGS (landed cost including import duties, freight to warehouse)
Packaging cost per unit
Pick, pack, and handling cost (if using 3PL, this is explicit; if self-fulfilled, calculate labour cost per order)
Step 2: Define your variable cost rates
These are percentages or per-unit costs that apply across products:
Payment processing rate (typically 1.5-2.9% plus per-transaction fees)
Marketplace commission rate (if applicable-Amazon charges 6-45% depending on category)
Average shipping cost by product weight/size tier
Return rate by category with associated cost per return
Step 3: Allocate marketing spend
For the calculation period, pull total marketing spend by channel. Then allocate based on attributed revenue using the weighted methodology described above.
Step 4: Calculate per-unit contribution margin
The formula:
> Contribution Margin = Net Revenue - COGS - Packaging - Handling - Shipping - Payment Processing - Returns Cost - Allocated Marketing
Step 5: Calculate contribution margin ratio
> CM Ratio = Contribution Margin ÷ Net Revenue × 100
This percentage tells you what portion of each revenue dollar survives to cover fixed costs and profit.
Benchmark Ranges for Australian Ecommerce
What constitutes a "good" contribution margin? 35% to 75% range, though this varies significantly by category and business model.
For Australian operators in the $2M-$5M revenue range, here are realistic benchmarks by category:
Category | Target CM Range | Common Pitfalls |
|---|---|---|
Beauty/Skincare | 40-55% | High return rates on shade-specific products; expensive shipping for liquids |
Apparel | 35-50% | Return rates of 20-40%; heavy discounting culture |
Home & Garden | 30-45% | Bulky items crush shipping margins; seasonal inventory risk |
Electronics | 20-35% | Thin base margins; high competition; warranty/return costs |
Pet Supplies | 35-50% | Heavy/bulky products; subscription potential improves margins |
Health/Supplements | 45-60% | Tight regulations; but lightweight shipping and low returns |
If your contribution margins fall below these ranges, you have a structural problem that no amount of revenue growth will solve.
Phase 1: The 30-Day Profit Triage
Understanding contribution margin is useless without action. The first 30 days after implementing the Profit Anatomy Protocol should focus on rapid triage-identifying and addressing the highest-impact opportunities and threats in your product portfolio.
Week 1: Build Your Contribution Margin Dashboard
Before you can make decisions, you need visibility. Most ecommerce platforms don't provide native contribution margin tracking, so you'll need to build a parallel system.
For businesses on Shopify, the minimum viable stack includes:
Order data export (including discount codes, shipping revenue, and costs)
Ad platform exports (Meta, Google, TikTok) with conversion attribution
3PL or shipping cost data by order
Payment processor fee statements
Consolidate this data into a spreadsheet or BI tool (Google Sheets works for businesses under $5M; larger operations should consider dedicated analytics platforms).
Calculate contribution margin for every order over the past 90 days. Then aggregate by SKU to identify your actual top and bottom performers-ranked by contribution margin dollars, not revenue.
Week 2: Identify Your "Profit Vampires"
That 62% unprofitable SKU statistic applies to your business too-you just don't know which products yet. Your job in Week 2 is to identify them.
Sort your SKUs by contribution margin ratio (lowest to highest). Products in the bottom quartile are your "profit vampires"-they consume resources, warehouse space, marketing spend, and customer service attention while destroying margin.
For each vampire, ask: 1. Is the negative margin due to pricing, costs, or marketing inefficiency? 2. Can the underlying economics be fixed, or is this product structurally unprofitable? 3. What happens to customer experience if we discontinue this SKU?
Create three categories:
Fixable vampires (price increases, cost reduction, or marketing reallocation can restore positive margins)
Terminal vampires (structural unprofitability; schedule for discontinuation)
Strategic vampires (loss leaders that drive profitable upsells or customer acquisition worth preserving)
Week 3: Reprice for Reality
29% pricing struggles. For many ecommerce operators, the contribution margin analysis reveals that their pricing was set based on gross margin targets-not the true cost of customer acquisition and fulfillment.
For your fixable vampires and any borderline products, calculate the price increase required to achieve your target contribution margin. The formula:
> Required Price = (Target CM% × Current Revenue + Total Variable Costs) ÷ (1 - Target CM%)
Yes, raising prices feels risky. But consider: if a product has a -5% contribution margin, you literally lose money on every sale. Selling more of it makes your business worse. A price increase that reduces volume by 20% but restores positive margins is a win.
Test price increases gradually. Start with 5-10% on your lowest-margin products and monitor conversion rate impact over 14 days before making further adjustments.
Week 4: Reallocate Marketing Spend
The 32% of SKUs with active ad spend generating zero revenue represents pure waste. But even among products that do generate revenue, marketing spend is often misallocated.
Your contribution margin analysis will reveal products that generate positive gross margin but negative contribution margin specifically because of marketing costs. These products are being over-promoted relative to their margin capacity.
Meanwhile, high-margin products often receive disproportionately low marketing investment because they're "already performing well." This is backwards. High-margin products can absorb higher customer acquisition costs and remain profitable-they should receive more marketing spend, not less.
Rebalance your ad budget based on contribution margin capacity:
Products with CM > 50%: Aggressive spend acceptable (can absorb higher CAC)
Products with CM 30-50%: Moderate spend; optimize for efficiency
Products with CM < 30%: Minimal spend; focus on organic or email-driven sales
Products with negative CM: Zero paid acquisition spend until margins are fixed
Phase 2: Building the Long-Term Margin Machine
Triage addresses immediate threats. Long-term success requires building systems that continuously optimise contribution margin across your entire operation.
Install Real-Time Margin Monitoring
The Profit Anatomy Protocol shouldn't be a quarterly exercise-it should be a daily operating metric. When the cost stack leaves little room for error in ecommerce, you need visibility into margin changes as they happen.
Build automated alerts for:
Cost spikes: Shipping rates, supplier costs, or ad costs exceeding thresholds
Margin degradation: Products whose CM drops below target over a 7-day rolling window
Return rate increases: Early warning of product quality or listing accuracy issues
Promotion abuse: Excessive discount code usage destroying margins
For Australian businesses, monitor currency fluctuations if you source internationally. A 5% movement in AUD/USD can shift COGS significantly for imported goods.
Develop Your Margin-First Product Development Process
50-70% gross margins through strategic product development. They don't achieve these margins by accident-they design for them.
Before adding any new SKU, run a contribution margin projection:
What is the expected COGS at your forecast order volume?
What shipping tier will this product fall into based on weight and dimensions?
What category-appropriate return rate should you assume?
What customer acquisition cost is realistic based on your historical performance?
If the projected contribution margin doesn't meet your threshold (I recommend 35% minimum for new products), either redesign the product economics or don't launch it.
This discipline prevents the accumulation of profit vampires that plague most ecommerce catalogues.
Optimise the Full Cost Stack
Contribution margin improvement comes from two directions: increasing revenue per unit or decreasing variable costs per unit. Most operators focus exclusively on pricing and ignore significant cost reduction opportunities.
Shipping optimisation. Negotiate carrier rates annually (at minimum). Consider dimensional weight optimisation-redesigning packaging to reduce billable weight. For Australian businesses shipping domestically, compare Australia Post, Sendle, Aramex, and regional carriers for your specific product profile. 20% rural surcharges for low-margin categories-consider excluding high-cost zones from free shipping offers.
Payment processing negotiation. At $2M+ in annual revenue, you have leverage to negotiate payment processing rates. A 0.3% reduction across all transactions adds directly to contribution margin.
Returns reduction. Every return prevented is pure margin saved. Invest in better product photography, sizing guides, video content, and customer reviews. Pre-purchase clarity reduces post-purchase disappointment.
Marketing efficiency. The #1 challenge for any DTC ecommerce brand is to balance growth while maximising contribution margin. This means relentlessly optimising marketing efficiency-not just ROAS (which ignores the cost of goods and fulfillment), but Marketing Efficiency Ratio (MER) measured against contribution profit, not revenue.
The Contribution Margin Ratio: Your New North Star Metric
Revenue growth is the wrong objective. Gross margin is incomplete. Even net profit, while important, is a lagging indicator that only becomes visible after the accounting period closes.
Contribution margin ratio-calculated in real-time across your product portfolio-should be your primary operational metric.
Here's why:
It predicts scalability. A business with 45% contribution margin can afford to invest in customer acquisition and still generate profit. A business with 15% contribution margin will struggle to scale profitably regardless of how much capital it raises.
It enables decision-making. When you know the contribution margin of every product, marketing channel, and customer segment, you can make rapid, confident decisions about resource allocation. Without it, you're guessing.
It aligns teams. Revenue targets create misaligned incentives-sales and marketing push volume regardless of profitability. Contribution margin targets align everyone around sustainable growth.
It surfaces problems early. Declining contribution margin is an early warning signal that something is wrong-rising costs, pricing pressure, channel mix shifts, or product quality issues. Net profit doesn't reveal these problems until it's too late to address them.
For Australian ecommerce businesses targeting sustainable growth, I recommend the following contribution margin benchmarks:
Minimum viable CM ratio: 25% (below this, the business model is broken)
Healthy CM ratio: 35-45% (sustainable growth is achievable)
Strong CM ratio: 45-55% (significant capacity for investment and expansion)
Exceptional CM ratio: 55%+ (pricing power and operational excellence)
80-90% failure rate. The survivors aren't the ones who chased revenue hardest. They're the ones who understood the true economics of every product they sold-and had the discipline to act on that understanding.
The Contribution Margin Calculator Tool
Below is a practical calculator framework for determining contribution margin by product. Apply this to each SKU in your catalogue to build a complete profitability map.
Input Variables
Variable | Description | Your Value |
|---|---|---|
Selling Price | Net price after any discounts (AUD) | $ |
COGS | Landed cost including duties and freight | $ |
Packaging | Per-unit packaging material cost | $ |
Handling | Pick, pack, and handling cost per unit | $ |
Shipping | Average shipping cost to customer | $ |
Payment Processing | % of selling price + fixed fee | $ |
Return Rate | Historical return % for this product | % |
Return Cost | Average cost per return (shipping + restocking) | $ |
Marketing Allocation | Attributed marketing cost per unit sold | $ |
Calculation
Example Calculation
An Australian skincare brand selling a moisturiser:
Variable | Value |
|---|---|
Selling Price | $79.00 |
COGS | $18.50 |
Packaging | $2.20 |
Handling | $3.50 |
Shipping | $9.80 |
Payment Processing (2.4% + $0.30) | $2.20 |
Return Rate | 8% |
Return Cost | $15.00 |
Marketing Allocation | $14.00 |
Calculation:
Net Revenue = $79.00 × 0.92 = $72.68
Returns Cost Allocation = 0.08 × $15.00 = $1.20
Total Variable Costs = $18.50 + $2.20 + $3.50 + $9.80 + $2.20 + $1.20 + $14.00 = $51.40
Contribution Margin ($) = $72.68 - $51.40 = $21.28
Contribution Margin (%) = $21.28 ÷ $79.00 × 100 = 26.9%
This product sits below the 35% target, indicating opportunities for price optimisation, cost reduction, or marketing efficiency improvements.
The Profitability Foundation
The operators who master contribution margin analysis don't just survive-they compound. Every pricing decision, marketing investment, and product launch builds on a foundation of economic truth rather than vanity metrics.
Your competitors are still celebrating revenue milestones while their margin erodes. Your advantage is clarity.
Use it.
