Category margin contribution: where you are busy but not profitable
The short answer
Subtract cost of goods and variable costs such as freight, returns handling and payment fees from each category's net sales, and you have its category margin contribution. Rank categories on contribution in place of revenue, then compare each category's share of revenue with its share of contribution. Big gaps show where you are busy but not profitable.
Contribution margin by category, worked through
Why it matters
Revenue rankings reward categories that move volume, even when freight, returns and discounts eat most of the margin. Ranking on contribution shows leadership which categories fund the business, and which absorb space, staff and stock for little return.
The question to ask
Copy this into Lexi as written.
How to work it out
1. Start from net sales. Take each category's sales after discounts and returns.
2. Subtract direct costs. Take off cost of goods kept, freight, returns handling and payment fees for each category.
3. Compare shares. Set each category's share of revenue against its share of contribution, and check which customers buy the low-contribution categories.
What the answer looks like
Illustrative output on sample data
Illustrative example: how Lexi answers this for a homewares retailer. It ranks categories by margin contribution after cost of goods, freight and returns, in millions of dollars.
- Furniture: 12.0 net sales, contribution 2.2
- Kitchenware: 6.0 net sales, contribution 2.4
- Bedding: 5.0 net sales, contribution 2.2
What the data shows
Furniture brings in 52% of revenue but only 32% of contribution. Kitchenware earns more on half the revenue.
What it means
Furniture buyers who also buy kitchenware and bedding are worth far more than furniture-only buyers, so furniture still brings customers in.
What to do
Price bulky freight into furniture and cross-sell kitchenware to furniture buyers.
Want me to show which customers buy across all three?
Frequently asked questions
What is margin contribution analysis?
Margin contribution analysis measures what each category, product or channel leaves after its direct costs: cost of goods, freight, returns handling and payment fees. It shows which parts of the business fund overheads and profit, which revenue and gross margin alone can hide.
Why can a category with good gross margin still contribute little?
Gross margin stops at cost of goods. Bulky or fragile categories carry heavy freight, high return costs and more damage, which come off after gross margin. A category can show a healthy gross margin and still leave little behind once those costs are counted.
Should I cut a category that contributes little?
Not on contribution alone. Check whether its buyers go on to buy higher-contribution categories, and whether customers expect it as part of your range. Often the better move is to fix the cost driver, such as delivery pricing or returns, and keep the category.