Revenue is up. The team is busy. You’re shipping products, serving customers, and attending trade shows. And yet — margins are shrinking. Every quarter the GM and the Finance team stare at the same number: gross margin, flat or down, despite the top line growing.
The answer to why is almost always sitting in your product portfolio. Specifically, in the 20–30% of SKUs that are quietly consuming resources, tying up working capital, and dragging down the contribution of your profitable products.
The problem is that most hardware-based SMEs don’t know which products those are. Not because the data doesn’t exist — it does, somewhere across your ERP, your distributor agreements, and your Shopee seller dashboard. But because nobody has ever assembled it into a SKU-level view of true margin.
This article shows you how to build that view. No consultancy required for the diagnosis. Just a spreadsheet, honest cost data, and the willingness to see what’s actually there.
Why Gross Margin Is Lying to You
Most hardware-based businesses track gross margin: revenue minus cost of goods sold. It’s the number on the P&L, it’s what the accountant reports, and it’s what you present to the board.
Gross margin is useful. It’s also incomplete to the point of being misleading for portfolio decisions.
Here’s why. Take a product with a 45% gross margin. Looks healthy. But now add the costs that gross margin ignores:
- Distributor margin: Your retailer or distributor takes 30–40% off RRP. This is captured in revenue, not COGS — but it’s a real cost of getting the product to market. For a full breakdown of how channel economics work across B2B, B2C, and B2B2C models, see our Channel Economics 101 guide.
- Marketplace commission: Shopee and Lazada take 3–7% of GMV plus payment processing. On a SGD $299 product sold through Shopee, that’s SGD $15–$20 per unit, gone before you see a cent.
- Fulfilment and last-mile: Warehousing, pick-and-pack, last-mile delivery. For bulky hardware this is often 8–15% of revenue per unit.
- Returns and warranty provision: Hardware returns run 3–8% of units in consumer channels. Warranty claims and field repairs add more. These are real costs that compound over a product’s life.
- Customer support allocation: Complex products generate more support tickets. If your smallest-margin product generates 40% of your support volume, that overhead belongs in its cost calculation.
Once you subtract all of these, your 45% gross margin product might be delivering 18% contribution margin — or less. And one of your quieter, lower-revenue products might be delivering 38%.
That’s the gap between gross margin and contribution margin. And for portfolio decisions — what to grow, what to cut, what to reprice — contribution margin is the only number that matters.
The 20/80 Reality in Hardware Portfolios
Across hardware SMEs and physical product businesses, a consistent pattern appears once you do the SKU-level analysis: roughly 20–25% of SKUs are responsible for 70–80% of total contribution margin. The remaining 75–80% of your portfolio is either marginally profitable, breaking even, or actively destroying margin.
This isn’t a theoretical distribution. It shows up consistently in practice. One analysis across a CPG client portfolio found that the “hero” product line — representing 31% of revenue — delivered only 12% of margin contribution once channel costs and fulfilment were properly allocated. Redirecting resources toward mid-tier SKUs improved overall profitability by 22% within eight months without growing revenue at all.
The implication for Singapore hardware SMEs is direct: if you have 40 SKUs and you’ve never done a contribution margin ranking, there’s a high probability that 8–10 of those products are net negatives — products that cost you money every time you sell them, once full channel costs are included.
And you’re probably spending sales and marketing resources promoting them.
The Five-Step SKU Margin Audit
Here’s how to do this yourself. You need a spreadsheet and data from three sources: your ERP or accounting system (COGS), your distributor/channel agreements (channel margins and fees), and your marketplace seller dashboards (commissions, fulfilment costs, returns data).
Step 1: Build your cost waterfall for each SKU
For each product, work down from selling price and subtract every variable cost in sequence. The output is contribution margin per unit.
| Cost Layer | What to include | Typical range (hardware products) |
|---|---|---|
| Revenue (RRP) | Your published retail price | — |
| Less: COGS | Materials, manufacturing, packaging, inbound freight | 35–55% of RRP |
| Less: Channel margin | Distributor discount, retailer margin, marketplace commission | 3–40% depending on channel |
| Less: Fulfilment & logistics | Warehousing, pick-pack, last-mile delivery | 5–15% of revenue |
| Less: Payment processing | Stripe, PayNow, card fees | 1.5–3.5% of revenue |
| Less: Returns & warranty | Return rate × (RRP + reverse logistics cost) + warranty claim rate × repair cost | 3–8% of revenue |
| Less: Variable support cost | Support tickets per SKU × cost per ticket | 1–5% of revenue for complex hardware |
| = Contribution Margin | What’s left to cover fixed costs and generate profit | Target: 25%+ for hardware |
Do this for every channel separately. Your SGD $299 security camera has a completely different contribution margin when sold through Shopee (commission + fulfilment absorbed), through a distributor (margin shared), or through a direct B2B contract (no channel margin, but higher sales cost).
Step 2: Apply actual volume to get total contribution
Once you have contribution margin per unit per channel, multiply by actual units sold through each channel over the past 12 months. This gives you total contribution — the actual money each product put toward covering your fixed costs.
A product with a 35% contribution margin and 2,000 units sold is generating SGD $210,000 in contribution (at a SGD $299 RRP). A product with a 12% contribution margin and 3,000 units sold is generating only SGD $107,640. The second product is selling more — but contributing far less. Now multiply that across 40 SKUs and rank them. For deeper context on building the underlying unit economics model, our Unit Economics Playbook covers the full framework.
Step 3: Rank your portfolio by contribution margin %
Sort every SKU from highest to lowest contribution margin percentage. You’re looking for three zones:
- Zone A (CM% above 30%): These are your margin engines. Every marketing dollar spent here works hardest. These SKUs are typically worth investing in — better channel mix, better positioning, more sales enablement.
- Zone B (CM% 15–30%): Workhorses. They contribute, but there’s usually margin leakage somewhere — often channel costs or returns that can be addressed. Audit the cost waterfall for optimisation opportunities.
- Zone C (CM% below 15% or negative): These need an immediate decision. Sub-15% contribution margin means you’re barely covering fixed cost allocation, let alone generating profit. Negative contribution margin means you are literally paying to sell this product.
Step 4: Cross-reference contribution with strategic role
Contribution margin alone doesn’t tell the whole story. Before you cut a Zone C product, ask four questions:
- Is it a door-opener? Some low-margin SKUs exist to win relationships that lead to high-margin follow-on business. An IoT gateway at 10% CM may be the entry point for a SGD $200,000 annual monitoring contract.
- Is it a fixed-cost carrier? A product with low CM% but high volume may be covering significant shared overhead — warehouse space, production line capacity, staff time. Removing it without a plan may not improve net profitability if those fixed costs remain.
- Is it a regulatory or certification requirement? Some products in industrial or safety hardware categories are required to maintain certifications or government contracts, regardless of their margin profile.
- Can the economics be fixed? Before cutting, run the numbers on what would need to change: a 15% price increase, a 10% COGS reduction, or a channel shift from distributor to direct. If any of these is achievable in 90 days, fix before cutting.
Step 5: Make the decision and set a review date
For each Zone C product, choose one of four actions — and commit to a timeline:
- Reprice: If the market will bear it, increase RRP. Even a 12% price increase on a SGD $199 product can move a product from 8% CM to 20% CM. Run a short test before committing.
- Reduce cost: Negotiate COGS with your manufacturer (viable at 500+ units/month), renegotiate distributor margin, or shift channel mix toward direct where you keep more margin.
- Reposition: Move the product to a channel or segment where the economics work. A product that loses money in Shopee may be viable as a corporate/B2B supply item at a different price point and without marketplace commission.
- Retire: End-of-life the product. Sell down existing inventory at a clearing price. Free up the cash, the warehouse space, and the team attention for products that actually earn.
Set a 90-day review for every decision. If you said you’d reprice — did it happen? Did margin improve? If you said you’d reduce cost — did the negotiation close? Margin audits only work if they lead to decisions, and decisions only work if someone is accountable for following through.
The Common Traps That Make This Harder Than It Should Be
Three things consistently derail SKU margin audits in Singapore hardware SMEs:
The cost data is fragmented. COGS lives in the ERP. Distributor margins live in individual contracts. Shopee fees live in the seller dashboard. Warranty costs live in the service team’s records. Nobody has ever pulled all of it into one place. The audit itself requires someone to do this assembly work — and it typically takes 2–3 days for a business with 20–50 SKUs. It’s worth it.
The founding team is emotionally attached to certain products. The product the founder designed. The product that won the first big contract. The product that was featured in a press article. These products get protected in portfolio reviews because of history, not economics. The margin audit should be done by someone who can separate the data from the story — ideally finance, or an external party.
The sales team fights every cut. Sales will always argue that the low-margin product is “strategic” or “builds the relationship.” Sometimes this is true. More often, it’s an argument for keeping a product that makes the salesperson’s job easier, regardless of whether it makes the company money. The structured decision framework in Step 4 exists precisely to separate legitimate strategic arguments from rationalisation.
What You Should Know After the Audit
A properly conducted SKU margin audit should give you five things:
- A ranked list of every SKU by contribution margin %, with total contribution in absolute dollars
- Identification of Zone C products and the specific cost driver making them unprofitable
- A clear decision for each Zone C product: reprice, reduce cost, reposition, or retire — with a named owner and a 90-day deadline
- A channel-level contribution view showing which routes to market are margin-positive and which are eroding your blended margin
- A model that you can update quarterly — so the next time someone asks “which products are making us money?”, the answer takes minutes, not weeks
You don’t need to retire half your product line to move the needle. In most hardware SME portfolios, addressing the bottom 3–5 SKUs — repricing two, cutting one, and repositioning two — can improve overall portfolio contribution margin by 5–8 percentage points. On a SGD $5M revenue base, that’s SGD $250,000–$400,000 in additional margin that was already sitting in the business, invisible because nobody had mapped the cost waterfall.
