Your best selling product may not be your most profitable
A product that sells 100 units a month will usually get more attention than one that sells 60. It moves faster, brings in more sales and appears to be doing a better job for the business.
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A product that sells 100 units a month will usually get more attention than one that sells 60. It moves faster, brings in more sales and appears to be doing a better job for the business. But sales volumes do not always tell the full story.
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A product that sells 100 units a month will usually get more attention than one that sells 60. It moves faster, brings in more sales and appears to be doing a better job for the business. But sales volumes do not always tell the full story. Once the cost of buying stock, discounts, returns and delivery are taken into account, a slower-selling product can leave more money in the business.
This is something small retailers can easily overlook. They know which products sell, but may not know how much each one contributes after the direct costs of making those sales have been paid.
More sales do not always mean more money
“Sales volume alone does not tell you which product is doing the most for your business. A slower-selling product can leave more money after its direct costs are paid.”
Consider a retailer selling two products. Product A sells 100 units at R100 each. The retailer pays R75 per unit to buy the stock. Product B sells 60 units at R150 each, with a purchase cost of R90 per unit. Product A generates R10,000 in sales, while Product B brings in R9,000. Looking only at turnover, Product A appears to be the stronger performer.
The picture changes when the stock costs are deducted.
| Product A | Product B | |
|---|---|---|
| Units sold | 100 | 60 |
| Selling price | R100 | R150 |
| Purchase cost per unit | R75 | R90 |
| Total sales | R10,000 | R9,000 |
| Total stock cost | R7,500 | R5,400 |
| Contribution | R2,500 | R3,600 |
Product B sells fewer units but leaves R1,100 more after the cost of stock is deducted. This does not automatically mean the retailer should stop selling Product A. It may attract customers or lead to other purchases. But the figures show why sales volume alone is not enough to judge how well a product is performing.
How to calculate contribution margin
Contribution margin measures how much money remains from sales after paying the variable costs directly linked to those sales. These costs usually increase as more units are sold. They can include stock purchases, packaging, delivery and transaction fees.
There are two useful calculations.
Contribution per unit = Selling price per unit − Variable cost per unit
Using Product A, the selling price is R100 and the stock costs R75.
R100 − R75 = R25 contribution per unit.
The retailer has R25 left from each unit sold after paying for the stock.
To calculate the contribution margin as a percentage of sales, use this formula:
Contribution margin (%) = (Total sales − Total variable costs) ÷ Total sales × 100
For Product A, the calculation is:
(R10,000 − R7,500) ÷ R10,000 × 100 = 25%
For Product B:
(R9,000 − R5,400) ÷ R9,000 × 100 = 40%
This means Product A contributes 25 cents towards fixed expenses and profit for every rand in sales. Product B contributes 40 cents.
The distinction matters. Product A generates more turnover, but Product B has a stronger contribution margin and a higher total contribution in this example. The calculation should include all relevant variable costs, not just the purchase price of stock. If the retailer pays a delivery fee or transaction charge on each sale, those costs should be included too. Discounts and returns must also be reflected in the actual sales figures.
Putting sales data to work
A business owner can start this exercise using monthly sales records and a spreadsheet. Tools such as Excel, Google Sheets or Rows can help organise the information and compare products. Start with the 10 or 20 products that account for most sales. Record the quantity sold, selling price, purchase cost, discounts and returns. Add delivery charges, packaging and payment fees where they apply.
The next step is to calculate the contribution for each product. This can reveal items that sell regularly but leave very little money after direct costs. AI tools can assist with organising and examining the data, but the owner should check the calculations against actual business records. Incorrect purchase costs or missing expenses can lead to poor pricing decisions. There is no need to analyse the entire product range immediately. A review of the biggest sellers can provide a useful starting point.
What the numbers can tell a business owner
A product with a low contribution margin may need a price review. The retailer could also look at negotiating a better price with suppliers, reducing delivery costs or changing how discounts are offered.
Some products may have a lower margin but still play an important role. They might bring customers into the shop, sell alongside higher-margin items or help the business move stock that would otherwise sit on shelves. That is why the figures need to be considered alongside how the business operates. A product should not be discontinued simply because its contribution margin is lower than another product's. Service businesses can use the same calculation. Instead of stock purchases, they can include materials, labour, transport and other costs directly linked to completing a job.
What should a business measure next month?
A monthly review should track contribution per product or service, contribution margin percentage, discounts, returns and delivery or transaction costs. It is also worth checking how much of the business's sales comes from its strongest contributors. One point needs to be kept in mind: contribution is not net profit. The money left after variable costs must still cover fixed operating expenses such as rent, salaries, insurance and electricity. What remains after all expenses have been paid is the business's profit.
The common mistake is to assume that a product doing well on the sales report is also doing well financially. A closer look at the costs can tell a different story. For a small business working with tight margins, knowing which products contribute the most can help with pricing, purchasing and decisions about where to focus sales efforts.
