Product profitability analysis: 4 steps

Your break-even point tells you how much to sell to avoid a loss, but only for the whole business. Product profitability analysis answers the next question: which products or services actually make the profit, and which sell a lot but leave little? Work it out from sales invoices and monthly costs in 4 steps: split sales by product, give each product only its variable costs, calculate and rank contribution margins, then decide discounts or cuts by that margin, not by allocated costs.

Example: the caterer's three lines

The same caterer sold SAR 208,000 in September across three lines: banquets, daily corporate meals and event trays. Its overall 56.1% contribution margin looks comfortable, but the average hides big differences:

Line	Sales	Margin (ratio)
Banquets	112,000	71,300 (63.7%)
Corporate meals	64,000	22,400 (35.0%)
Event trays	32,000	23,000 (71.9%)
Total	208,000	116,700 (56.1%)

SAR, September; margin means contribution margin; totals match the break-even lesson.

Step 1: split sales by product

Every sales invoice line should name the product or service, not free text like "customer order". The system then totals each line: banquets 112,000, corporate meals 64,000 (3,200 meals at SAR 20), trays 32,000. If one invoice covers a banquet and trays, give each its own line and price so tray sales stay out of banquets. If past invoices were never tagged, start this month; do not guess the past.

Step 2: give each product only its variable costs

A variable cost follows the product that caused it: ingredients from each dish's recipe and warehouse issue slips, hourly banquet staff on banquets only, delivery fuel by each line's trips. Corporate meals: ingredients 38,000 and fuel 3,600, or SAR 13 a meal. Fixed costs (81,100: rent, salaries and the rest) stay unallocated here; step 4 explains why.

Step 3: calculate and rank contribution margins

Contribution margin = sales − variable costs; its ratio = margin ÷ sales. Rank by amount and ratio together: banquets leave 71,300, 61% of the total margin. Trays are small but have the top ratio, 71.9%. Corporate meals bring 31% of sales but only 19% of the margin: SAR 7 a meal. Where there is a clear unit, like a meal or a tray, also work out the margin per unit: that is what you negotiate.

The thinnest margin feels price rises first. The General Authority for Statistics reports consumer food and beverage prices in September 2026 were 1.4% above September 2025. If kitchen ingredients rose at that rate, the corporate meals margin would drop SAR 532, or 2.4%, against 0.6% for banquets (ingredients 31,500). So recalculate monthly.

Step 4: decide by contribution margin, not allocated cost

Allocated by sales, corporate meals take 30.8% of fixed costs, about 24,950, and show a monthly loss near 2,550. Dropping them looks like the fix, but rent and salaries stay: you lose their whole 22,400 margin and net profit falls from 35,600 to 13,200. The rule: a positive-margin product helps cover fixed costs, and a drop decision counts only fixed costs that leave with it, like a driver dedicated to that line. Before dropping, try a higher price at renewal, less ingredient waste or a minimum order. Pricing a new product needs full cost instead: see the guide to pricing products and services.

Running it from WhatsApp

Owner (12 October): The construction company wants 10% off per meal to renew. Do we agree?
System: They take 2,000 meals a month at SAR 20; variable cost 13 leaves 7 a meal. At 18 only 5 remains, so the contract's margin drops from 14,000 to SAR 10,000 a month. Keeping it level needs 2,800 meals.
Owner: And if we refuse and they leave?
System: We lose 14,000 a month while fixed costs stay, so net profit falls from 35,600 to about 21,600.
Owner: Offer 5% if they take 2,400 meals.
System: Then it leaves 14,400 a month, 400 above today. Shall I draft it for you to send?

A monthly contract was decided in three messages, because every invoice line is tied to its product and cost. More on Arabic accounting from your phone.

Checklist before you decide

Is every sales invoice line tied to a product or service?
Did each product get its variable costs from recipes, issue slips and trips?
Did fixed costs stay out of each product's figure?
Did you rank products by margin amount and ratio together?
Did you check how a discount or cut changes the margin before deciding?

In short: product profitability analysis shows what each product leaves after its variable costs. Split sales by product, give each only its variable costs, and rank by contribution margin. Never drop a positive-margin product because allocated costs made it look like a loss, and check how any discount changes the margin before agreeing.