A product can make money on every sale and still weaken the business behind it. Edward Andrew Karpus provides a useful starting point for examining why leaders need to look beyond individual margins when deciding what deserves continued investment.
On paper, the decision may appear straightforward. If revenue exceeds the direct cost of producing or delivering something, the product seems worth keeping. Real businesses, however, operate through interconnected systems. Inventory, employee time, customer support, equipment, logistics, marketing, and management attention all carry costs that may not appear in a simple product-level calculation.
Profitability matters, but so does understanding what it takes to produce that profit.
A Healthy Margin Does Not Tell the Whole Story
Gross margin is useful because it shows the difference between revenue and the direct cost associated with generating it.
The limitation is that not every meaningful cost fits neatly into that calculation.
Imagine a company selling two products with similar margins. The first is simple to stock, rarely generates returns, and requires little customer support. The second requires specialized inventory, frequent troubleshooting, complicated fulfillment, and significant employee attention.
Looking only at the margin could make them appear equally attractive.
Operationally, they are very different.
That difference becomes important when a company decides where to put additional resources.
Complexity Has a Cost
Businesses sometimes underestimate how expensive complexity can become.
One additional product may require new suppliers, separate inventory, employee training, unique packaging, different software configurations, or specialized customer service procedures.
No single requirement may seem especially burdensome.
Combined, however, they can create a meaningful operational load.
Complexity can show up through:
- More steps required to complete an order
- Additional inventory that must be tracked
- More exceptions employees need to understand
- Increased opportunities for errors
- Longer training requirements
- Greater coordination between departments
A product can therefore remain profitable in isolation while making the overall organization harder to operate.
Employee Time Is Easy to Overlook
Not every cost arrives as an invoice.
Employee attention is one example.
A product that repeatedly requires manual corrections, special approvals, customer explanations, or management involvement consumes time that could have been used elsewhere.
That creates an opportunity cost.
If managers spend several hours each week resolving problems connected with one offering, those hours are unavailable for improving another product, developing employees, meeting customers, or solving larger operational issues.
The same principle applies to frontline teams.
A product that requires twice as much administrative work as alternatives may deserve closer examination even when its direct margin appears attractive.
Time is a limited business resource, whether or not it appears as a separate line item.
Inventory Can Change the Calculation
Physical products introduce another layer of complexity.
Inventory ties up capital before a sale occurs. Products that move slowly may occupy storage space for extended periods, while seasonal or unpredictable demand can leave companies with excess stock.
There may also be costs associated with:
- Warehousing
- Insurance
- Handling
- Damage
- Obsolescence
- Returns
- Discounting older inventory
A product can generate an attractive margin when sold at full price while becoming less appealing once the complete inventory cycle is considered.
This is especially important when a business must purchase substantial quantities in advance.
The question is not simply how much profit the sale generates. It is also what the company must commit while waiting for that sale.
Revenue Can Hide Customer-Service Demands
Some products generate more questions and complaints than others.
That matters.
A complicated product may require lengthy explanations before purchase. Customers might need additional assistance after purchase. Returns or exchanges may require manual intervention.
Each interaction adds cost.
More importantly, persistent service problems can affect the experience surrounding other parts of the business.
A customer waiting for support does not necessarily distinguish between the profitable product and the organization delivering it. The experience reflects on the company as a whole.
Businesses therefore benefit from examining support demand alongside sales performance.
High revenue does not automatically compensate for an offering that consistently creates avoidable friction.
Opportunity Cost Changes the Question
Perhaps the most important hidden cost is what the business cannot pursue because resources are already committed.
Shelf space used by one product cannot simultaneously hold another. Marketing money directed toward one offering cannot fund a different campaign. Development teams working on one feature cannot use those same hours to improve another.
This turns product evaluation into a comparison rather than a simple yes-or-no decision.
The relevant question becomes:
Is this the best use of the resources it requires?
A product may be profitable and still produce a weaker return on scarce resources than another opportunity.
That distinction becomes especially important for growing businesses, where decisions about attention and capacity can influence what the organization is able to pursue next.
Volume Can Make Small Inefficiencies Large
A process that wastes two minutes may appear insignificant.
Repeat it 10,000 times, and the situation changes.
Product profitability can behave similarly.
Minor packaging inefficiencies, small fulfillment delays, frequent manual entries, or modest return rates may seem manageable at low volume. As sales increase, those issues multiply.
Growth can therefore expose costs that were easy to ignore earlier.
This is one reason businesses should reconsider economics as products scale.
An offering that worked well at $100,000 in annual sales may create very different operational demands at $1 million.
Greater revenue does not automatically mean the original process remains appropriate.
Some Products Have Strategic Value Beyond Immediate Profit
The analysis can also work in the opposite direction.
A product with modest standalone profitability may still deserve a place in the business if it serves a broader purpose.
For example, an offering might introduce customers to the company before they purchase other services. Another may complement a highly profitable core product. A particular item might help maintain an important supplier relationship or meet a customer need that strengthens retention.
These benefits should not be assumed.
They should be understood.
The goal is not to eliminate everything that fails to maximize immediate profit. It is to know why each important offering belongs in the portfolio.
Strategic value is more useful when it can be explained than when it becomes a vague justification for keeping underperforming products indefinitely.
Product Reviews Should Include More Than Sales
A useful product review can combine financial and operational questions.
Leaders might consider:
- How much does the product contribute after its full costs?
- How much employee time does it require?
- Does it create unusual service or return demands?
- How much inventory must be maintained?
- Does it complicate other processes?
- What resources could be used differently?
- Does the product support other valuable customer relationships?
- Would eliminating it simplify the business meaningfully?
Looking across these questions can reveal situations that a sales report alone would miss.
A popular product is not automatically a strong product for the business.
The Best Decision May Be Improvement Rather Than Elimination
Identifying hidden costs does not mean a product must immediately disappear.
Sometimes the underlying problem is fixable.
A company might simplify packaging, renegotiate supplier terms, automate a manual process, revise return policies, improve customer instructions, or reduce unnecessary variations.
These changes can preserve revenue while reducing operational burden.
In other situations, increasing the price may better reflect the actual cost of delivering the product.
The analysis should identify the source of the problem before determining the response.
Removing an offering is one option, not the only one.
Profitability Is Stronger When the Whole Business Benefits
Businesses need profitable products, but product-level profit should not be viewed in isolation.
Every offering uses some combination of money, time, space, systems, inventory, and employee attention. Those resources have alternative uses.
A strong business decision therefore considers both what a product earns and what the organization must do to support it.
That broader perspective can reveal why two products with similar margins may have very different value to the company.
The most important question is not simply whether an offering makes money each time it is sold.
It is whether keeping, growing, or improving that offering makes the overall business stronger.