Manage Your Business
Should it stay or go? Evaluating your product mix.
Evaluate your product mix to increase your bottom line
The following story is intended to help small business owners navigate some of the trickiest aspects of managing their business. It is brought to you by Chase Business Banking.
Running a healthy business depends on knowing which offerings are the most profitable and where you may lose money. When you understand these details, you can make informed product and marketing decisions to increase your bottom line.
There may be times when dropping a product or service makes sense, but you need to weigh the decision carefully. "It isn't only a matter of whether an item is profitable," says Brent Reinhard, managing director of product and marketing for Chase Business Banking. "There may be other, compelling reasons to keep low-earners in your lineup."
Consider these four questions to make the right choice:
1. Is the offering earning you money?
Compare the costs involved in producing a product or providing a service with the revenue you earn from it. Account for materials, packaging, staff time and any other direct costs. For example, this story helps describe the process of maximizing business profitability.
To get a clear view of whether a product or service pays for itself, consider only costs directly associated it, not overhead expenses you might allocate across all your offerings. Those are important when you consider the profitability of your business as a whole, but can be put to the side for a "keep or drop" decision.
You'll also need an accurate view of revenue associated with the offering. Be sure to look at actual sales results for a given time period in order to factor in any discounted pricing.
2. Does it play a supporting role in other sales?
You may sell a number of related products and services, so it's important to consider how dropping one might impact the sales of others. For example, an electronics store that sells digital cameras might make little profit on them, but earn more on higher-margin accessories such as tripods or camera cases. Or, a small manufacturer may keep making a particular part even though it's not profitable in order maintain a broad product line and keep customers from looking elsewhere.
"Keeping an unprofitable offering can make sense if it helps a business increase its overall profits," Reinhard says. "In some cases, 'loss leader' products and services can also help to lay the groundwork for new customer relationships."
For example, a roofing and gutter company might offer a low-cost gutter cleaning service to attract homeowners who may need more extensive work in the future. Though the service might cost the company money, this tactic is worthwhile if the revenues earned through future work far exceed those costs.
Review your past sales to assess how often a product is purchased with a related item, or how reliably a service leads to more profitable business. If you stopped selling a product and sales of a related item dropped by 10 percent, how might that impact your profits overall? There may be a point at which keeping the unprofitable item proves more beneficial to your bottom line.
3. Could the freed-up resources be used for another purpose?
If dropping a product or service would let you dedicate staff, equipment or space toward a new or more profitable endeavor, then it may be worth doing so. For example, a software company might drop an old product and redirect staff to supporting or upgrading a newer program that addresses a more lucrative niche. Or, a sporting goods manufacturer might drop an unprofitable product from its catalog and use the freed-up capacity to meet increased demand for better selling items. Your chief financial officer or accountant can help you build financial projections to understand the consequences of making such a shift.
4. Can you charge more?
Sometimes, the costs that go into a product or service slowly creep up, but you haven't reviewed the price you set for it. In these cases, you might test whether customers will pay a higher price. This can be worth trying even if you've determined that an offering deserves a spot in your line-up as a loss leader.
The decision to drop a product or service should be made only after careful analysis of what it could mean for your business. Going through the process periodically can help you better understand the return you receive on your spending, and how best to direct your efforts.
Ami Albernaz is a Chase News contributor. Her work has appeared in The Boston Globe and The Christian Science Monitor.