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The SKU Dilemma – How Adding or Removing a Product Impacts Your Bottom Line

The SKU Dilemma – How Adding or Removing a Product Impacts Your Bottom Line

Every decision, whether it’s packaging, pricing, or product selection has a ripple effect on your business. Some drive growth, others add complexity, and many come with hidden costs or benefits.

This series explores key business decisions, helping you make informed choices that align with your goals. 

Today’s decision: should I add or remove a product?

Expanding your product range can seem like an easy way to grow your business more choices mean more customers, right? But adding or removing a product SKU (Stock Keeping Unit) isn’t just about variety; it affects your costs, inventory management, fulfilment efficiency, and overall profitability.

A new SKU can bring in fresh revenue, attract different customer segments, and increase average order value. But it also comes with risks: higher inventory costs, production complexity, and potential cannibalisation of existing sales. Similarly, removing a slow-moving SKU can reduce overhead and free up resources but if done carelessly, it can lead to lost customers or brand perception issues.

So, how do you decide 

  • The benefits and risks of adding vs. removing SKUs
  • The key inputs and outputs of this decision
  • How product selection affects your bottom line

By the end, you’ll have a framework to make SKU decisions that are profitable, data-driven, and scalable.

When Adding a SKU Makes Sense

Expanding your product line can help capture new customers, increase revenue, and strengthen your brand but only if done strategically.

✅ Reasons to Add a New SKU:

✔ You have customer demand. If customers frequently request a specific variation or complementary product, adding it can increase loyalty and sales. ✔ Your best customers want more. If your existing audience needs more variety, an extra SKU can increase repeat purchases. ✔ You’re seeing gaps in your product mix. If competitors are offering a key item that you don’t, you could be losing business. ✔ It increases your average order value (AOV). If the new SKU encourages bundling or upsells, it can boost revenue per order. ✔ You can leverage existing suppliers and fulfilment. If you can introduce a product without major cost increases, the risk is lower.

But adding SKUs isn’t always a win. Let’s look at the downsides.

❌ Risks of Adding a SKU:

  • Increased production and storage costs - Manufacturing, warehousing, and shipping complexity rise
  • Slower inventory turnover - If the new SKU doesn’t sell fast enough, cash flow is tied up in stock
  • Customer confusion on what to choose - Too many options can reduce conversions if the right buying guidance isn't provided
  • Marketing dilution - You now have to market and support more products

When Removing a SKU Makes Sense

On the flip side, removing an underperforming SKU can improve profitability and simplify operations. But cutting the wrong product can alienate customers or reduce brand value.

✅ Reasons to Remove a SKU:

✔ Low sales volume. If a product isn’t selling well despite marketing efforts, it may be better to cut losses. ✔ High return or complaint rates. If customers frequently return or complain about an SKU, it could be harming your brand. ✔ Operational inefficiencies. If one SKU is causing supply chain delays or fulfilment issues, removing it could streamline processes. ✔ Better use of resources. If a product ties up cash that could be better used elsewhere, it’s worth considering removal.

❌ Risks of Removing a SKU:

  • Losing loyal customers. If a niche group depends on a specific SKU, cutting it may result in lost revenue.
  • Negative brand perception. If you discontinue a well-loved product without a replacement, it could damage trust.
  • Missed future opportunities. A low-selling SKU today could become popular with better marketing or a seasonal push.

Key Inputs & Outputs of the SKU Decision

Input Factor

Corresponding KPI

Cash Flow Category

Sales Performance

Units Sold, Revenue Per SKU

Product Sales 

Customer Demand & Feedback

Customer Reviews, Survey Responses

Customer Experience

Production & Supplier Costs

Cost Per Unit, Manufacturing costs

Cost of Goods Sold (COGS) - manufacturing 

Storage & Inventory Costs

Inventory Turnover, warehouse expenses 

Cost of Goods Sold (COGS) - warehousing

Profit Margins

Gross Profit Per SKU, Net Profit Margin

Expenses, Income

Marketing Spend Per SKU

Customer acquisition costs, ROAS (Return on Ad Spend)

Marketing Expenses

Return & Refund Rates

Refund Rate, Chargebacks

Customer Expenses

A data-driven approach to SKU decisions ensures you’re not making changes based on emotion or assumptions but rather on hard numbers that reflect your business health. CloudFO automatically categorises your cash flows and calculates the KPIs (highlighted in blue).

Final Thoughts: The Right SKU Mix for Profitability

Every product you add or remove affects your bottom line, fulfilment, and customer experience. The key is to strike a balance, having enough variety to drive sales without overloading your business with unnecessary complexity.

In Part 2, we’ll explore how to use data to validate new SKU opportunities before launching and how to decide when to cut a product to keep your business lean and profitable.

Stay tuned!

Want to take the guesswork out of SKU decisions?

Tracking your sales, margins, returns, and fulfilment costs can help you decide which SKUs are worth keeping and which should go. Instead of manual calculations, CloudFO automatically categorises your expenses and revenue by SKU so you can make the best decision for your bottom line.