SKU Profitability Calculator

The 80/20 rule shows up brutally in ecommerce catalogs. A typical DTC store finds that its top five or six SKUs drive 60 to 80 percent of total profit, while a long tail of SKUs runs at break-even or loses money once you allocate ad spend properly. The problem is that founders often look at revenue to decide what to reorder and promote. Revenue lies. A $50K revenue SKU with 8 percent margin makes less profit than a $20K revenue SKU with 35 percent margin. Use this calculator at the SKU level before you cut next quarter's POs.

Allocation is the trickiest part. If you do not track SKU-level ad spend inside your ad platform (which most brands do not, because it is hard to set up cleanly), allocate blended ad spend based on revenue share. A SKU that did 12 percent of revenue gets 12 percent of blended ad spend. This is imperfect but good enough for 80 percent of product portfolio decisions. For flagship SKUs that you actively run dedicated campaigns for, use actual campaign spend.

Run this quarterly across your top 20 SKUs by revenue. You will find at least two that surprise you: one that looks like a star on the revenue report but is a thin-margin drag, and one that looks mid but has hero-tier margin. Reallocate accordingly.