Updated:
December 30, 2025
13 min
The Cross-Subsidisation Problem Killing Ecommerce Margins
Every ecommerce catalogue contains products that are quietly destroying value. They look fine on revenue reports-sales are happening, customers are buying-but when you account for true costs, they generate losses on every transaction.
The insidious part? These loss-making products are often hidden by profitable ones. Your winners cross-subsidise your losers, masking the problem until margin pressure becomes critical.
cross-financing problem-profitable SKUs cover for loss-making SKUs, instead of cutting out SKUs or changing pricing or selling strategies. This is the default state of most ecommerce businesses: unknown cross-subsidisation draining profits that could be reinvested in growth.
The fix isn't complicated. It's product-level profitability analysis-understanding the true economic contribution of every SKU in your catalogue. But most operators never do it because the analysis seems daunting and the data feels scattered.
This template solves that problem. It provides a structured approach to product profitability analysis that any ecommerce operator can implement, regardless of technical sophistication.
Why Revenue Rankings Deceive
Sort your products by revenue and you'll get a list. Your "top sellers" appear at the top; your slow movers appear at the bottom. This feels like useful information.
It's not.
Revenue rankings ignore costs entirely. A product generating $50,000 in monthly revenue with 15% gross margin contributes $7,500 to overhead. A product generating $20,000 in monthly revenue with 60% gross margin contributes $12,000. The "top seller" is actually the worse product from a contribution perspective.
The deception compounds when you factor in variable costs beyond COGS:
Marketing costs: High-revenue products often require heavy advertising spend
Return rates: Popular products in certain categories (fashion, especially) carry massive return costs
Shipping subsidies: Large or heavy products may cost more to ship than customers pay
Customer service load: Some products generate disproportionate support tickets
A product that appears profitable at the gross margin level can become unprofitable-or even value-destroying-when these costs are allocated.
45% gross, 10% net margin gap after accounting for marketing, fulfillment, and operational expenses. That 35-percentage-point gap is where product-level profits live or die.
The Product Profitability Analysis Framework
The Product Profitability Analysis Framework provides a systematic approach to calculating true profit contribution at the SKU level. It operates in four layers, each adding precision to the analysis.
In my experience, most brands stop at gross margin when analysing product performance. They know which products have good markup, but not which products generate actual profit after all costs are attributed. A product with 65% gross margin can easily become a 5% net contributor-or negative-once fulfillment, marketing, and overhead are properly allocated. This template forces that analysis.
Layer 1: Gross Margin Calculation
The foundation of product profitability is gross margin-revenue minus cost of goods sold.
For each product, calculate:
> Gross Margin ($) = Unit Selling Price - COGS (Landed Cost) > Gross Margin (%) = Gross Margin ($) ÷ Unit Selling Price × 100
COGS should include:
Product cost (purchase price or manufacturing cost)
Inbound freight (supplier to warehouse)
Import duties and customs fees
Quality inspection costs
Packaging materials
Common Mistakes:
Using purchase price without freight and duties (understates COGS by 5-15%)
Using average cost when FIFO/LIFO would be more accurate
Ignoring packaging costs (can be 3-8% of COGS for some products)
Template - Layer 1:
SKU | Revenue | Units Sold | Selling Price | COGS | Gross Margin ($) | Gross Margin (%) |
|---|---|---|---|---|---|---|
A001 | $45,000 | 500 | $90 | $32 | $58 | 64.4% |
A002 | $62,000 | 775 | $80 | $38 | $42 | 52.5% |
A003 | $28,000 | 400 | $70 | $45 | $25 | 35.7% |
Layer 2: Variable Cost Allocation
Gross margin ignores variable costs that vary by product. Layer 2 allocates these costs to each SKU.
Shipping Cost Allocation:
For each product, determine average shipping cost: > Average Shipping Cost = Total Shipping Cost for SKU ÷ Units Shipped
If you offer "free shipping," this cost comes from your margin. Products with high shipping costs relative to price destroy margin even if gross margin looks healthy.
Payment Processing Allocation:
> Payment Processing Cost = Selling Price × Processing Rate (typically 2-3%)
Returns Cost Allocation:
Calculate the true cost of returns for each product: > Returns Cost per Unit Sold = (Return Rate × Units Sold × Cost per Return) ÷ Units Sold
Where cost per return includes:
Return shipping (if you pay)
Inspection and restocking labour
Write-down on resale value (if applicable)
Template - Layer 2:
SKU | Gross Margin ($) | Shipping/Unit | Processing/Unit | Returns Cost/Unit | Variable Costs/Unit |
|---|---|---|---|---|---|
A001 | $58 | $8.50 | $2.25 | $3.20 | $13.95 |
A002 | $42 | $6.00 | $2.00 | $8.50 | $16.50 |
A003 | $25 | $12.00 | $1.75 | $2.10 | $15.85 |
Note how A002's returns cost ($8.50) dramatically impacts its position despite strong volume.
Layer 3: Marketing Cost Attribution
Perhaps the most challenging-and most important-allocation is marketing cost.
Option A: Direct Attribution (Ideal)
If products are advertised separately with trackable campaigns: > Marketing Cost per Unit = Campaign Spend for SKU ÷ Units Sold from Campaign
Option B: Revenue-Weighted Attribution
For blended campaigns: > SKU Marketing Allocation = Total Marketing Spend × (SKU Revenue ÷ Total Revenue) > Marketing Cost per Unit = SKU Marketing Allocation ÷ Units Sold
Option C: Category Attribution
For category-level campaigns: > Category Marketing Allocation = Category Spend > SKU Share = SKU Revenue ÷ Category Revenue > SKU Marketing Cost = Category Allocation × SKU Share
Template - Layer 3:
SKU | Variable Costs/Unit | Marketing Spend | Units Sold | Marketing/Unit | Total Variable/Unit |
|---|---|---|---|---|---|
A001 | $13.95 | $6,750 | 500 | $13.50 | $27.45 |
A002 | $16.50 | $9,300 | 775 | $12.00 | $28.50 |
A003 | $15.85 | $2,800 | 400 | $7.00 | $22.85 |
Layer 4: Contribution Margin Calculation
With all variable costs allocated, calculate true contribution margin:
> Contribution Margin ($) = Gross Margin ($) - Total Variable Costs per Unit > Contribution Margin (%) = Contribution Margin ($) ÷ Selling Price × 100
Template - Complete Analysis:
SKU | Selling Price | COGS | Gross Margin | Total Variable Costs | Contribution Margin ($) | Contribution Margin (%) |
|---|---|---|---|---|---|---|
A001 | $90 | $32 | $58 | $27.45 | $30.55 | 33.9% |
A002 | $80 | $38 | $42 | $28.50 | $13.50 | 16.9% |
A003 | $70 | $45 | $25 | $22.85 | $2.15 | 3.1% |
Critical Insight: A003 appeared to have acceptable gross margin (35.7%) but contributes only 3.1% after variable costs. This product is barely breaking even-and may be unprofitable in months with higher shipping or marketing costs.
Product Portfolio Classification
With contribution margin calculated for each SKU, classify your products into strategic categories.
The Product Profitability Matrix
Quadrant 1: Stars (High Volume, High Margin)
Contribution Margin: >25%
Sales Volume: Above median
Strategy: Protect and optimise. Ensure stock availability. Consider premium positioning to capture additional margin.
Quadrant 2: Cash Cows (High Volume, Low Margin)
Contribution Margin: 10-25%
Sales Volume: Above median
Strategy: Efficiency focus. Can margin be improved through cost reduction or modest price increases? If not, accept as volume drivers.
Quadrant 3: Question Marks (Low Volume, High Margin)
Contribution Margin: >25%
Sales Volume: Below median
Strategy: Growth opportunity. Increase marketing investment. Test demand elasticity. If volume can be increased, these become stars.
Quadrant 4: Dogs (Low Volume, Low Margin)
Contribution Margin: <10%
Sales Volume: Below median
Strategy: Discontinue or dramatically reprice. These products consume resources without adequate return.
Red Zone: Value Destroyers (Negative Contribution Margin)
Contribution Margin: <0%
Strategy: Immediate action required. Either discontinue, significantly increase price, or dramatically reduce costs. Every sale of these products loses money.
Strategic Portfolio Analysis Template
SKU | Revenue | CM ($) | CM (%) | Volume Rank | Margin Rank | Classification |
|---|---|---|---|---|---|---|
A001 | $45,000 | $30.55 | 33.9% | 2 | 1 | Star |
A002 | $62,000 | $13.50 | 16.9% | 1 | 2 | Cash Cow |
A003 | $28,000 | $2.15 | 3.1% | 3 | 3 | Dog |
Benchmark Margins by Category
Your product margins should be evaluated against category-appropriate benchmarks. 50-70% beauty margins, while other categories operate with much thinner margins.
Australian Ecommerce Contribution Margin Benchmarks:
Category | Target Gross Margin | Target Contribution Margin |
|---|---|---|
Beauty/Skincare | 60-75% | 35-50% |
Apparel/Fashion | 50-65% | 25-40% |
Home/Garden | 45-55% | 25-35% |
Health/Supplements | 55-70% | 35-50% |
Electronics | 25-40% | 12-22% |
Pet Supplies | 45-55% | 28-38% |
Food/Beverage | 40-55% | 20-30% |
Products falling significantly below these benchmarks warrant investigation. Either costs are too high, prices are too low, or the product may not be viable in your business model.
The 30-Day Product Profitability Sprint
Implementing product profitability analysis doesn't require months of preparation. This 30-day sprint delivers actionable insights quickly.
Week 1: Data Gathering
Day 1-2: Extract Order Data
Export all orders from past 12 months
Include SKU, quantity, revenue, and date
Day 3-4: Compile Cost Data
Document COGS for each SKU (landed cost)
Calculate average shipping cost per SKU
Document return rates by product/category
Day 5-7: Marketing Attribution
Export advertising spend by campaign
Map campaigns to products/categories
Calculate revenue-weighted attribution for blended campaigns
Week 2: Analysis Build
Day 8-10: Layer 1 & 2 Calculations
Calculate gross margin per SKU
Allocate shipping, processing, and returns costs
Build analysis spreadsheet
Day 11-12: Layer 3 Calculations
Allocate marketing costs to SKUs
Calculate total variable costs per unit
Day 13-14: Contribution Margin Calculation
Calculate contribution margin per SKU
Rank products by CM dollars and percentage
Week 3: Strategic Classification
Day 15-17: Portfolio Analysis
Classify products into matrix quadrants
Identify Stars, Cash Cows, Question Marks, Dogs
Flag any Value Destroyers (negative CM)
Day 18-19: Root Cause Investigation
For Dogs and Value Destroyers, identify primary margin drag
Is it COGS? Shipping? Returns? Marketing?
Document potential fixes
Day 20-21: Opportunity Sizing
Quantify impact of discontinuing Value Destroyers
Quantify impact of optimising Dogs
Prioritise actions by profit impact
Week 4: Action Planning
Day 22-24: Pricing Decisions
Identify products where price increases are warranted
Calculate required price to achieve target CM
Plan implementation approach
Day 25-26: Discontinuation Decisions
Finalise products to discontinue
Plan inventory wind-down
Communicate decisions to relevant teams
Day 27-28: Optimisation Roadmap
Document cost reduction opportunities
Identify marketing efficiency improvements
Create 90-day optimisation plan
Day 29-30: Monitoring Setup
Establish monthly profitability review cadence
Create automated CM tracking dashboard
Set alerts for products falling below thresholds
Common Product Profitability Pitfalls
Pitfall 1: Ignoring Seasonality
Product profitability varies by season. A product profitable in Q4 (high demand, no discounting needed) may be unprofitable in Q2 (heavy discounting to clear inventory). Analyse profitability across time periods, not just annual totals.
Pitfall 2: Averaging Return Rates
A 15% average return rate might include products at 5% and products at 40%. Product-level return rates reveal which SKUs actually drive return costs.
Pitfall 3: Underestimating Marketing Costs
20-33% Amazon ad costs, dramatically impacting product profitability. Ensure marketing costs are fully captured, including agency fees and creative production.
Pitfall 4: Ignoring Customer Service Costs
Some products generate disproportionate support volume. If measurable, allocate customer service costs to high-touch products.
Pitfall 5: Static Analysis
Costs change. Supplier prices increase. Shipping rates adjust. Marketing costs fluctuate. Refresh your profitability analysis quarterly at minimum.
From Analysis to Action: Strategic Decisions
Product profitability analysis enables four categories of strategic decisions.
Decision 1: Discontinuation
Products with negative or minimal contribution margin should be discontinued unless:
They serve as traffic drivers (measurable halo effect on other products)
They're new products in a testing phase
They complete a necessary product range (customer expectation)
For everything else: discontinue. 3% median margin in 2024 for ecommerce brands-there's no room for value-destroying products.
Decision 2: Pricing Adjustment
Products with acceptable volume but weak margin are pricing candidates. Calculate the price increase required to achieve target contribution margin:
> Required Price = (Target CM% × Current Revenue + Total Variable Costs) ÷ (1 - Target CM%)
Test price increases incrementally. Monitor conversion rate changes. The optimal price maximises contribution dollars (margin × volume), not margin percentage alone.
Decision 3: Cost Reduction
For high-volume products with margin pressure, cost reduction may be preferable to price increases. Investigate:
Supplier negotiations or alternative sourcing
Packaging optimisation (weight reduction)
Shipping method changes
Return rate reduction through better product descriptions or sizing guides
Decision 4: Marketing Reallocation
Shift marketing investment from low-CM products to high-CM products. The same dollar of ad spend generates more absolute profit on a 40% CM product than a 15% CM product.
This seems obvious but runs counter to typical optimisation: marketers often scale spend on whatever is "converting" without considering margin. ROAS of 3:1 on a 50% margin product beats ROAS of 4:1 on a 20% margin product.
The Product Profitability North Star
The metric that should guide all product decisions is Contribution Profit Dollars-not margin percentage, not revenue, not units sold.
> Contribution Profit = Contribution Margin ($) × Units Sold
A product with 25% CM selling 1,000 units generates $25 × 1,000 = $25,000 in contribution profit. A product with 35% CM selling 400 units generates $35 × 400 = $14,000. The lower-margin product is more valuable because it generates more absolute profit.
When making discontinuation, pricing, or investment decisions, always model the impact on total contribution profit, not just margin percentages.
The Product Analysis Framework
Product Profitability Analysis Template
Use this template to analyse your own product catalogue.
Step 1: Data Collection Checklist
☐ Export 12-month order data by SKU ☐ Document landed COGS for each SKU ☐ Calculate average shipping cost per SKU ☐ Document payment processing rate ☐ Calculate return rate by SKU or category ☐ Estimate return cost per return ☐ Export marketing spend by campaign/category ☐ Map marketing spend to SKUs
Step 2: Per-SKU Calculation Template
Field | Formula | Example |
|---|---|---|
Selling Price | From orders data | $85.00 |
COGS (Landed) | Product + freight + duties | $31.00 |
Gross Margin ($) | Price - COGS | $54.00 |
Gross Margin (%) | GM / Price | 63.5% |
Shipping Cost | Avg shipping per unit | $9.50 |
Processing Cost | Price × 2.5% | $2.13 |
Returns Cost | Return Rate × Cost per Return | $4.80 |
Marketing Cost | Allocated spend / units | $11.50 |
Total Variable Costs | Sum of above | $27.93 |
Contribution Margin ($) | GM - Variable Costs | $26.07 |
Contribution Margin (%) | CM / Price | 30.7% |
Step 3: Portfolio Classification Template
CM Range | Volume Position | Classification | Strategy |
|---|---|---|---|
>25% | Above Median | Star | Protect & optimise |
>25% | Below Median | Question Mark | Invest to grow |
10-25% | Above Median | Cash Cow | Efficiency focus |
10-25% | Below Median | Cash Cow | Monitor; improve if possible |
<10% | Any | Dog | Reprice or discontinue |
<0% | Any | Value Destroyer | Immediate action |
Step 4: Action Planning Template
SKU | Classification | Primary Issue | Recommended Action | Profit Impact |
|---|---|---|---|---|
[SKU] | [Class] | [Issue] | [Action] | [$ impact] |
The businesses that win aren't those with the most products or the highest revenue. They're the ones who understand exactly which products make money-and have the discipline to act on that knowledge.
Your product profitability analysis starts today.
