How to Calculate True SKU-Level Profitability (With Template)

Stop guessing which products make money. The standard “gross margin” calculation that most D2C brands rely on misses 40-60% of the costs that determine whether a product is actually profitable.

Here's the exact formula we use with our clients—and a template you can apply to your own SKU data today.

Why Gross Margin Lies

When you calculate gross margin, you typically subtract COGS from selling price. Simple. But this misses crucial variable costs that directly impact the profitability of each sale:

• Payment gateway fees (1.5-2.5% of order value)
• Platform/marketplace commissions (15-25% on marketplaces)
• Packaging costs (often allocated to “overhead”)
• Shipping costs (especially for free shipping offers)
• Return probability costs
• Customer acquisition cost allocation

The True SKU Profitability Formula

Example Calculation

Let's walk through a real example for a ₹1,500 fashion item:

Compare this to the “40% gross margin” that most brands would report. The true contribution margin is 32.4%—and that's before fixed costs and inventory carrying costs.

Applying This to Your Catalog

Once you calculate true profitability for each SKU, you'll typically find:

• 20-30% of SKUs are actually unprofitable
• Your “best sellers” by volume are often not your most profitable products
• Heavy or bulky items cost more than you realized
• High-return categories destroy margin

Action Steps

1. Export your top 50 SKUs by sales volume
2. Gather the variable costs for each
3. Calculate true profit using the formula above
4. Sort by contribution margin percentage
5. Identify which products to promote, reprice, or discontinue