The formula
contribution = (price − cost) × units sold
What it means
Ranking by percentage margin rewards the expensive product that barely sells. What pays the bills is total contribution, which multiplies each unit's margin by the units actually sold. A product on 75% margin selling five units contributes less than one on 20% selling a thousand.
How to work it out by hand
- Subtract cost from price for each product: that is its unit margin
- Multiply by the units sold: that is its contribution
- Add the contributions for the total
- Sort from highest to lowest and look at each one's share
What is worth knowing
Typically a handful of products carry most of the margin, and that list is the one worth keeping in mind when deciding what to promote, what to renegotiate with the supplier and what to drop. Watch the negative-margin products: sometimes they are there on purpose, as a draw to sell something else, and sometimes they have been losing money for months because a cost went up and nobody revisited the price.