Direct product profitability (or DPP) is a profitability metric for retail products and categories. In measuring DPP, retailers factor in such line items as storage, handling, and manufacturer’s allowances, warranties, and financing plans into calculations of earnings on specific product sales. DPP is a theoretically powerful measure of profit that has fallen out of favor, but it may be revived in other forms such as activity-based costing (ABC).
The purpose of retail product profitability metrics is to assess the effectiveness and profitability of individual product and category sales. /retailers and distributors have a great deal of choice regarding which products to stock and which to discontinue as they make room for a steady stream of new offerings. By measuring the profitability of individual stock keeping units (SKUs), managers develop the insight needed to optimize such product selections. Profitability metrics are also useful in decisions regarding pricing, display, and promotional campaigns.
Specifically, DPP identifies profitable SKUs and realistically calculates their earnings.
This metric quantifies the adjusted gross margin, less direct product costs.
Direct product profitability (%) = Gross margin ($) – Direct product costs ($)
Cost allocation is often imprecise. Some products may be intended not to generate profit but to drive traffic.
- ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc.