Contribution margin per SKU

Ask a store owner for their best product and they will name the top row of the revenue report. Ask for the margin on it and you usually get a pause, then a number that turns out to be gross margin, which is not the same thing and is often not close.

This matters more than it sounds. Your top SKU by revenue is usually the one carrying the most ad spend, the deepest discounting and the highest return rate, because that is how it got to the top. Strip those out and the ranking can invert completely.

Gross margin is not contribution margin

Gross margin subtracts the cost of goods and stops. Contribution margin keeps going, and subtracts every cost that this specific product caused. That second list is where the surprises live.

Fixed costs stay out. Rent, salaries and software do not change because you sold one more unit, so including them tells you nothing about whether the next sale is worth making.

The four costs that hide

• Returns, spread properly. If 8 percent of units come back and half are unsellable, that cost belongs across all 100 units, not booked as a one-off. High-return products with healthy gross margins are the most common false winner in a catalogue.
• Discounts as given. If a third of the volume moves during promotions, the average realised price is well below list. Rank on what you actually received.
• Real shipping. Free shipping is a marketing decision with a cost that lands on the product. Bulky and heavy SKUs can look fine on gross margin and lose on delivery.
• Ad spend by product, not blended. This is the big one. A blended CAC across the catalogue flatters the products that consume the most budget and penalises the ones that sell themselves organically.

The rank flip

This is not an argument for killing the top SKU. It is often a genuine acquisition product that brings in customers who then buy the profitable ones. It is an argument for knowing which role each product plays, so you stop scaling spend on an acquisition product as though it were a profit product.

Split first order from repeat

A product can lose money on the first order and be one of your best assets, if the customers it acquires come back. That is a completely different business decision from one that loses money on every order forever, and a single blended margin number cannot tell them apart.

Calculate contribution margin twice per product: once on first orders, once on repeat orders. Negative on first and strongly positive on repeat is an acquisition product. Negative on both is a leak.

LTV to CAC, by cohort

Blended lifetime value across all customers ever is a comforting number that describes a business you no longer run. It is dominated by your oldest, best customers who arrived when acquisition was cheaper. Cohort it instead: group customers by the month they first bought, and track each group separately.

On what the ratio should be, treat the numbers below as a widely used rule of thumb rather than a law. The 3 to 1 figure comes out of subscription businesses and gets repeated across ecommerce; it is a reasonable starting point, but your own margin structure and payback period matter more than the ratio itself.

• Under 3 to 1 usually means acquisition is costing more than the relationship is worth, and you are buying revenue rather than building profit.
• Around 3 to 1 is the usual healthy zone for a store carrying normal overhead.
• Well over 4 to 1 often means you are under-investing. You could profitably acquire more customers than you are.

The trend across cohorts matters more than any single ratio. If each month's cohort is worth a little less than the last at the same acquisition cost, that is the early warning that shows up as a bad quarter two quarters later.

How to run it the first time

1. Take your top five SKUs by revenue and pull the last 90 days.
2. For each, work out landed cost, realised price after discounts, real shipping and payment fees, and returns spread across all units.
3. Attribute ad spend by product as best you can. Imperfect and product-level beats precise and blended.
4. Re-rank by contribution. If the order changes, you have found your next pricing or spend conversation.
5. Repeat it monthly, because costs creep and the ranking moves.

Where Wizzy comes in

The reason this is not already on your dashboard is that the inputs live in five systems that do not talk: orders in your store, ad spend in each platform, costs in a spreadsheet, returns in a helpdesk, fees in a statement. Wizzy joins them, tracks expected against actual contribution margin per SKU using your real costs and fees, splits first-order from repeat-order profit, and flags the moment a product's true margin slips, before it shows up as a bad quarter.