How to Identify Unprofitable Customers and SKUs

Step 1 — Get past gross margin

Gross margin at the invoice line ignores most of what makes a customer expensive: delivery frequency, order size, returns, rebates, credit terms and service intensity. A contribution view has to attribute those costs before any ranking is meaningful.

Step 2 — Allocate on drivers people believe

Allocate freight by drop and weight, warehouse handling by lines picked, and credit cost by days outstanding. Precision matters less than credibility: an allocation the commercial team accepts will change behaviour, while a technically superior one they dispute will be argued about for six months and change nothing.

Step 3 — Rank on contribution, then look at the disagreement

• List customers by revenue and by contribution side by side.
• The accounts where the two rankings differ most are where the story is.
• Repeat the exercise at SKU level, adding complexity cost such as short runs and slow-moving stock.
• Plot scale against margin quality to see which accounts are large and thin versus small and strong.

Step 4 — Choose the remedy before the conclusion

Exit is the last option and rarely the best one. Most low-contribution relationships respond to a minimum order value, a delivery frequency change, a terms adjustment, a pack or specification change, or a straightforward price conversation supported by the cost-to-serve facts.

Volume that covers fixed cost still has value; the question is whether it earns its incremental cost, not whether it clears the average.

Step 5 — Make it recurring

A one-off profitability study ages quickly. Building the same view into the monthly management pack keeps the ranking current and catches drift before it becomes structural.