The SKU Looked Profitable… Until We Shipped It

(A U.S. home décor buyer’s view on the only profit model that matters)

I’ve approved SKUs that looked like guaranteed winners on paper—great gross margin, trend-right, “easy add-on.” Then the first month hit reality: a higher-than-expected return rate, a few damaged cartons, and a late-season markdown to clear space for the next floor set.

That’s when you learn the hard truth:

Your profit model for SKUs is either built for real retail… or it’s built for wishful thinking.

NRF projects total retail returns at $849.9B in 2025, and estimates 19.3% of online sales will be returned. In a returns-heavy world, “gross margin” is only the beginning of the story.

What Buyers Mean by a “Profit Model for SKUs”

Most suppliers talk about unit cost and FOB. Buyers talk about friction—the invisible costs that show up after the PO:

returns and return fraud friction
markdown pressure (the “sell-through tax”)
inventory carrying cost (cash tied up, storage, obsolescence)

So my SKU profit model isn’t one number. It’s a short P&L.

The SKU P&L I Actually Trust

Here’s the buyer version (simplified, but honest):

Net Profit per SKU =
(Net Selling Price − Landed Cost − Variable Ops Cost − Returns/Damage Allowance − Markdown Allowance) × Units Sold
− Inventory Carrying Cost Impact

Where “Landed Cost” includes the stuff that quietly kills programs:

freight + fuel volatility (even when the base rate “looks fine”)
packaging that actually prevents damage (not “pretty cartons”)
compliance labeling / documentation overhead (when applicable)

And yes—inventory carrying costs are real enough that many operations references cite 20%–30% of inventory value annually as a typical range (varies by business).

The 3 Profit Killers That Don’t Show Up in a Line Sheet

1) Returns are a margin expense, not a customer service issue

If 19.3% of online sales are returned (NRF’s 2025 estimate), your SKU economics must assume return friction from day one.
That means you don’t just ask “Will it sell?” You ask:

Will it arrive intact?
Will it match photos and expectations?
Will it hold up to touch and handling?

2) Markdowns aren’t a “one-time event”—they’re a system

Markdowns happen because assortments move in seasons, not in spreadsheets. McKinsey notes that improving markdown strategy can protect profits substantially—citing potential margin-rate improvement of 400 to 800 basis points with better markdown optimization.
So your profit model for SKUs needs a markdown assumption, not a perfect-world sell-through fantasy.

3) Inventory carrying cost punishes slow movers quietly

Even a “profitable” SKU can lose in the real world if it sits. If holding costs run 20%–30% of inventory value annually, the slow SKU is paying rent every day.

The 2 Metrics That End Arguments Fast: GMROI and Turn

When my team debates a SKU, I usually bring it back to two questions:

GMROI: “How much gross profit did we earn for every dollar tied up in inventory?”

Investopedia defines GMROI (Gross Margin Return on Investment) as an inventory profitability ratio calculated by dividing gross margin by average inventory cost.
In buyer language: it punishes slow turns and rewards repeatable winners.

Inventory Turn: “How fast does this SKU convert cash?”

Retail performance analysis often relies on inventory turnover and gross margin because retail is inventory-driven.
A SKU that turns faster can be “less sexy” and still be the profit hero.

A Practical Profit Model You Can Copy (Buyer-Friendly Template)

If you’re a supplier and you want to sound like someone who understands buyers, build your offer around these fields:

Target retail price (and the actual competitive set)
Landed cost range (not one number)
Expected return rate risk (what design/packaging choices reduce it?)
Markdown risk (what makes it season-proof or reorder-proof?)
Turn strategy (is it a replenishment SKU or a seasonal drop?)
Carrying cost sensitivity (how long can it sit before it becomes a loser?)

This is how buyers translate “a product” into “a program.”

The Secret: Every Assortment Needs 3 Different Profit Models

When I build a chain assortment, I don’t expect every SKU to make money the same way.

Traffic Driver (Hero SKU)
Lower margin is fine—if it increases basket size and store dwell time. But the packaging and returns risk must be controlled.
Margin Builder (Quiet Winner)
The SKU that isn’t flashy, but turns reliably with low damage/returns. These are the GMROI engines.
Replenishment Staple (Reorder Machine)
The “boring” item that stays consistent across batches and seasons. This is what keeps cash flowing when trends shift.

If a supplier can’t tell me which role a SKU is designed for, they usually don’t understand how retail profit really works.

What I Need From Suppliers If You Want Me to Trust Your SKU Profit Model

If you’re pitching to U.S. retail buyers, send fewer SKUs and more certainty:

a clean landed-cost breakdown (and what moves it)
packaging logic tied to damage prevention (especially for fragile/high-touch items)
a returns-risk narrative (how you reduce “not as pictured” and damage)
a markdown/seasonality stance (what stays relevant; what’s a limited drop)
a reorder control plan (golden sample, tolerances, finish control)

That’s how you go from “vendor” to “preferred supplier.”