Does the 80:20 rule still hold true?
Many business owners are familiar with the 80:20 rule, also known as the Pareto Principle. It suggests that 80% of your profits come from 20% of your efforts or products. While it sounds good in theory, many assume it doesn’t apply to their business. At Conjura, we help businesses realize the true contribution margin of all their SKUs, whether they sell directly on Shopify or via Amazon. Our findings often shock our customers: “I was sure we were making money on X…”
To illustrate this, we conducted a study on 50 of our customers. We analyzed order data along with costs of goods sold, ad spend, warehousing, and payment costs. The results are eye-opening for operators but not surprising for us.
Key Findings from the Study
Contribution Margin Concentration:
Approximately 85% of all contribution margin (close to net margin) comes from the top quartile (25%) of SKUs on average across the 50 brands. The 80:20 rule holds true, proving that a small percentage of products drive the majority of profits.
Unprofitable SKUs:
Among half of our customers, an average of 62% of SKUs were unprofitable. This is a stark reminder that business resources are wasted on products that may never generate profit in their lifetime.
Action Plan: What Should You Do Next?
Conduct a Detailed Analysis:
• Assess the contribution margin of each SKU in your catalog.
• Identify which products are driving profits and which are not.
Refine Your Advertising Strategy:
• Avoid integrating your entire product catalog into ad platforms.
• Focus your ad budget on the top-performing SKUs to maximize returns.
Cost Management:
• Monitor and control costs associated with each product, including goods sold, warehousing, and payment processing.
• Reduce or eliminate spending on unprofitable SKUs.
Regular Reviews:
• Make it a routine to review the profitability of your product lineup.
• Adapt your strategy based on these insights to stay profitable.
By following this action plan, you can optimize your product portfolio, reduce losses, and focus on what truly drives your business forward. Conjura is here to help you navigate these complexities and achieve sustained profitability.
Seeking help?
We understand completing this analysis and maintaining it regularly takes time and expertise. This gets to the heart of why Conjura was developed in the first place: to deliver rapid analysis from complex data sets and lead users of all types to actionable conclusions.
Get instant and free onboarding with Conjura’s Retail Analytics. Or connect with our team to uncover the secrets behind your most profitable products.
