The Problem: Revenue Climbing, Profits Vanishing
A Melbourne-based eCommerce brand selling homewares and lifestyle products had built an impressive growth story. Over three years, annual revenue had grown from $800K to $3.1 million. The founders had appeared in several trade publications, landed a coveted stockist partnership, and expanded their SKU range from 40 products to over 160.
But their accountant had raised a quiet alarm: despite tripling revenue, net profit had actually declined in absolute dollar terms. The founders were confused and, frankly, disbelieving. They were selling more than ever. How could they be making less?
When Marginfy was engaged, the answer emerged quickly — and it came in layers.
The business had no model for true product profitability. Revenue was tracked by SKU. Cost of goods was captured at a product level. But the full picture — including pick-and-pack costs, merchant fees, returns handling, inbound freight, storage fees, and the cost of packaging by product dimension — had never been assembled. Profit in the business's internal reporting was calculated as revenue minus product cost. Every other cost was treated as an overhead, invisible at the product level.
This meant the founders had been making ranging, marketing, and stocking decisions based on fundamentally incomplete data.
Marginfy's Approach
The first task was building a full landed cost model for every SKU in the catalogue. This was a detailed exercise involving the brand's 3PL provider, their Shopify and Amazon Seller Central accounts, and their freight and returns data. For each SKU, Marginfy modelled:
- Cost of goods including inbound freight and duty where applicable
- Warehouse storage cost based on cubic volume and average days in storage
- Pick, pack and dispatch cost by order type and package dimension
- Merchant and platform fees by channel
- Return rate and average cost per return
- Customer acquisition cost allocated by channel and product category
The model took three weeks to build and required several rounds of data reconciliation with the 3PL. When complete, it produced a contribution margin per unit for every product — a number that had never existed in the business before.
The results dismantled a number of the founders' assumptions. Several of their highest-revenue products turned out to have negative contribution margins once fulfilment costs were included. A large, bulky candle holder that sold well on the website had a return rate of 18% due to transit damage, and its storage footprint made it disproportionately expensive to hold. The business was effectively paying to sell it.
Meanwhile, a small range of compact, lightweight products with consistent repeat purchase rates were generating exceptionally high contribution margins and had been chronically under-marketed relative to their profitability.
Marginfy then conducted a channel profitability review, separating the economics of the Shopify DTC channel, the Amazon marketplace, and the wholesale stockist relationship. Each channel carried significantly different cost structures. The Amazon channel, which the founders considered core to their growth strategy, was shown to be operating at a near-zero net margin once all fees and promotional spend were accounted for.
A customer lifetime value analysis completed the picture. The brand's best customers — those acquired through organic social and email — had a 24-month LTV approximately 3.4 times higher than those acquired through paid search, yet the business was allocating 60% of its marketing budget to paid channels.
The Results
The SKU rationalisation process that followed was methodical. Using the landed cost model as the decision framework, 64 SKUs — 40% of the catalogue — were identified for discontinuation, either immediately or at the end of existing inventory. The criteria were clear: negative or sub-5% contribution margin, high return rates, or low repeat purchase frequency with no strategic justification for retention.
The reduction in catalogue complexity had immediate operational benefits. Warehouse storage costs fell. The operations team spent less time managing supplier relationships for marginal products. Marketing could focus promotional spend on a tighter, more profitable range.
Within four months of implementation, net margin improved by 6 percentage points. Cash flow improved materially as inventory investment was concentrated in fewer, faster-turning lines. The business freed up approximately $85,000 in working capital that had been tied up in slow-moving stock.
The founders described the process as uncomfortable but transformational. The business they had been running and the business the data revealed were quite different — and the gap between the two had been quietly costing them for years. With a functioning profitability model now embedded in their operations, they have the infrastructure to make decisions about new product launches with their eyes open.