Which of Your Products Actually Makes Money? A Simple Method to Find Out
Stop guessing and start knowing which products drive your profits
Here's a surprising truth: many businesses don't actually know which of their products make money. They know which products sell the most, but revenue isn't profit. Some of your best-selling items might actually be losing you money when you account for all costs. Here's how to find out.
Why Revenue Doesn't Equal Profit
A product that sells for 100 EUR isn't automatically profitable. To find real profit, you need to subtract: direct costs (materials, labor for that specific product), and a fair share of overhead (rent, utilities, admin). Many businesses skip this calculation and assume their top sellers are their most profitable. Often, they're wrong.
- A high-volume, low-margin product might make less than a low-volume, high-margin one
- Some products take disproportionate time/resources to sell or deliver
- Hidden costs like returns, support, and packaging eat into margins
The Simple 3-Step Profitability Calculation
You don't need complex software to calculate product profitability. Here's a simple method you can do in a spreadsheet:
- Step 1: List selling price minus direct costs (materials, direct labor, shipping) = Gross Margin
- Step 2: Estimate time spent per sale (including selling, order processing, delivery) and multiply by your hourly labor cost
- Step 3: Subtract result from Gross Margin = Contribution to profit
Example: Two Products Compared
Product A sells for 200 EUR with 100 EUR in direct costs and takes 2 hours to sell and deliver. Product B sells for 50 EUR with 15 EUR in costs and takes 15 minutes. At 25 EUR/hour labor cost: Product A contributes 50 EUR. Product B contributes 28.75 EUR. But if you sell 10x more of Product B, it actually generates more total profit.
- Don't just look at per-unit profit - consider volume
- Factor in how much of your time each product consumes
- Some products have high upfront effort but recurring revenue
What To Do With Unprofitable Products
Once you identify low or negative margin products, you have options:
- Raise prices - sometimes customers will pay more than you think
- Reduce costs - can you source materials cheaper or simplify delivery?
- Discontinue - if you can't make it profitable, stop selling it
- Bundle with profitable items - use it as a loss leader strategically
Focus Your Marketing on Winners
Once you know which products are truly profitable, shift your marketing and sales focus accordingly. Many businesses waste money promoting their least profitable products because those happen to be the most popular.
- Direct advertising spend toward high-margin products
- Train sales team to upsell profitable items
- Position low-margin products as add-ons, not main attractions
Know Your Numbers
Product profitability analysis is one of the highest-impact exercises a business can do. It often reveals that a small percentage of products generate most of the profits - and some products actually lose money. Armed with this knowledge, you can make smarter decisions about pricing, marketing, and product development.
Get a Professional Profitability Analysis
We specialize in helping businesses understand exactly where their profits come from - and where they leak. Book a free consultation to discuss your situation.
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