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Loss-Making SKUs

Update on February 18, 2024

1. Definition:

- Loss-making SKUs refer to specific stock-keeping units (individual products) within a business’s inventory that contribute to overall losses rather than profits.

2. Identification:

- Loss-making SKUs are identified through a comprehensive financial analysis that compares the cost of goods sold (COGS) and associated expenses (such as shipping, storage, and marketing costs) against the revenue generated from sales of those SKUs.

3. Negative Contribution Margin:

- Loss-making SKUs typically have a negative contribution margin, meaning that the revenue generated from sales is insufficient to cover the direct and indirect costs associated with producing, storing, and selling the product.

4. Analyzing Profitability:

- Businesses analyze the profitability of each SKU by comparing the revenue generated from sales against the total costs incurred in producing and selling the product.
- Loss-making SKUs are identified when the total costs exceed the revenue generated, resulting in a negative profit margin.

5. Strategic Decision-Making:

- Identifying loss-making SKUs is crucial for strategic decision-making.
- Businesses may choose to discontinue or phase out loss-making SKUs to minimize losses and allocate resources more effectively to profitable products.

6. Adjusting Pricing or Costs:

- Businesses may consider adjusting pricing strategies or reducing costs associated with loss-making SKUs to improve profitability.
- This could involve renegotiating supplier contracts, optimizing manufacturing processes, or implementing targeted pricing adjustments.

7. Marketing Strategies:

- Loss-making SKUs may benefit from targeted marketing strategies aimed at increasing sales and improving profitability.
- This could involve promotional campaigns, bundling strategies, or cross-selling initiatives to enhance the appeal and sales performance of these products.

8. Inventory Management:

- Effective inventory management is essential for handling loss-making SKUs.
- Businesses may implement strategies such as inventory reduction, liquidation sales, or inventory write-offs to minimize the financial impact of holding onto unsold or low-performing products.

9. Continuous Monitoring:

- Identifying loss-making SKUs is an ongoing process that requires continuous monitoring and evaluation.
- Regular analysis of SKU profitability allows businesses to adapt and adjust strategies in response to changing market conditions and customer preferences.

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