HERDING GAZELLES | Karl Stark and Bill Stewart

What You're Not Doing to Maximize Profit (But Should Be)

If you don’t know which products create the most value for your business, you’re probably missing out on key growth opportunities.

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Using product profitability or bottom line value creation to help determine the appropriate marketing mix is one of the more difficult metrics for management teams to accurately measure. Many businesses struggle to meaningfully measure profitability of individual products in their portfolio, and too often they are stymied by the belief that they do not have the resources available to accumulate the data and sufficiently track their products’ profitability. However, there are ways that all businesses, even small businesses, can improve the ways they measure and manage product profitability to drive bottom line growth.

We were recently helping a client evaluate ways to grow their product offerings in one line of business. Assessing their product portfolio, we encountered two products that ran at a loss. When we shared this information with the management team, they responded that the products were in fact profitable, but the true product costs allocated to the products were inaccurate, which skewed the metric and made them seem unprofitable.

This was certainly not a sustainable model for making value-creating business decisions. Further investigation unveiled that the company’s customer service representatives were spending a disproportionate amount of time enrolling customers in these two products, driving even greater losses than were originally represented by the true product cost.

The takeaway: Accurately determining true product costs allows the team to trust the metric and make accurate decisions on product profitability.

Adopting a Product Profitability Mindset

A friend of ours who runs a chain of retail stores recently confided that she struggled determining which of her product lines was most successful and where she should be investing to grow her business. She asked for advice on how to avoid the feeling that her decisions were based on gut feelings.

This business owner does not have the means to evaluate the profitability of thousands of different SKUs, but what she can do is determine the gross profit generated per square foot (one of her other largest operating costs) at a brand level. This isn’t a perfect measure for product profitability, but it gets close enough to make meaningful business decisions.

The takeaway: Even in a small business, using product profitability to make business decisions can be powerful in driving bottom line growth.

Have you attempted to use product profitability to drive your growth?  Share your experiences with us at karlandbill@avondalestrategicpartners.com.

Karl Stark and Bill Stewart are Managing Directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself, and is ranked No. 95 on the 2011 Inc. 500 list. @karlstark