Do you know which products or services are profitable and increase profit? Or, equally important, do you know which ones are costing you money?
Chances are you offer multiple product or service lines, and you probably know how much revenue each brings in (if you don’t, let’s figure that out first). Do you know which ones are the most profitable? Offering products and services that contain a healthy margin is essential to any business. Here is how to get started analyzing your current offerings and how to decide if a future offering will make the (financial) cut.
Step 1. Determine the Purpose: Deciding to offer a new product or service ought to begin with the basic question: what is the purpose of adding this product or service? The answer might be to make money, but stop and think about it for a minute; other valid reasons may be to increase sales of another product or service or to satisfy your customers and clients by making their lives easier, which increases their loyalty to you. You may want to be the “one stop shop” for your customers in your field; recognize that, and define your products and services with that vision in mind.
Step 2. Support your Goals: Once you are clear about your goals, it’s time to learn which product and service are meeting those goals. I once interviewed a large department store that’s policy was to only enter a new product line if the depth of that department could stand as an independent store in a mall. Can your products or services survive on their own, or do they rely on other products or services to survive? Let’s walk through an example:
Business: hair salon
Services Offered: hair styling, massage, and nail care.
Products Offered: hair and body care products.
Step 3. Allocate Costs: Each product or service should be recorded as a separate line item within the bigger category. For example: hair coloring would be a line item within hair styling and shampoo sales would be a line item within hair products, (which is within hair and body products).
Costs associated with each product or service should be recorded individually, within the bigger category: payroll for hair stylists is a cost of offering hair coloring as are the associated products.
Step 4. Determine Profit: To determine the true profit from each product or service line, allocate incremental overhead to each. True cost accounting would tell you to allocate a portion of all overhead costs; I think you get a clearer picture by only considering incremental costs.
Step 5. Review and Act: Review your stated goal for each; which products or services are not meeting your goal, which ones increase profit? Chances are you have products or services that are not meeting your stated objectives. Take a closer look to see where you can make adjustments. If you can’t, and your goal stands, it may be time to cut the product or service line loose. If you do, you just may be surprised by how much time and energy you save without losing any profit.