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Product profitability analytics

What is it?

Product profitability analytics is the process for discovering profitability by individual product. Most businesses know how profitable the business is but very few take the time to dig deeper into the individual profitability of each product or service they offer. As a result few businesses know which of their products are making money and which of their products are losing money.

In order for profitability analytics to be genuinely meaningful and commercially useful beyond revenue and gross margins, it is necessary to uncover hidden or specific profit and losses pertinent to the product range.

This is, however, much easier said than done. Many businesses have large, complex product lines and operationally it is often very difficult to separate costs across those product lines accurately. For example, methods used to allocate sales, marketing, advertising or customer service costs to each product can be much too arbitrary to yield any real value. Plus there are often multiple suppliers and changing raw material costs that can add to the confusion. But without an understanding of what products are profitable and which products are eating profit, poor strategic decisions are likely so it’s always worth the effort.

Product profitability analytics helps businesses to uncover profitability insights across the product range so better decisions are made and profit is protected and grown over time.

Why does it matter?

It matters because businesses need to stay competitive and need to know where money is being made and lost. Product profitability analytics allows you to factor in the real costs associated with each product so that you can make adjustments which will positively impact profit.

If you discover that one product makes more profit than all the others then you may want to promote that product more heavily and invest in some research and development to find new more profitable products.

Alternatively if you discover that a product is making a loss then you can either make operational and production changes to bring the product into profit or drop the product from the line. Of course you would need to run additional analytics before you made any major decisions so you don’t inadvertently damage profit.

For example, I worked with a supermarket that run product profitability on their product range and discovered that one of the washing up liquids that they stocked always lost money. In fact it was actually costing the supermarket money to stock the product. Looking at these results in isolation would indicate the supermarket should stop stocking the product. Luckily we were also doing a lot more analytics and also discovered that the people who bought that particularly washing up liquid happened to be their highest spenders. If they had removed that product from their shelves then it’s highly likely they would have upset their most profitable customers who may have decided to go to a different supermarket to get that particular washing up liquid.

When do I use it?

You should consider using product profitability analytics when you start out in your business or whenever you change your product and service offering.

You should know what products are your winners, which are your loss leaders and which are your dogs at any given time. And you should make a point of reviewing that information strategically at least once a year.

There are usually significant costs involved in adding new products or services to your range so you want to be absolutely sure the ones you do add and keep are paying their way.

What business questions is it helping me to answer?

Product profitability analytics provides answers as to which products or services that you are offering make you money and which lose you money. The business questions product profitability analytics can help you answer include:

  • Which products or services are profitable?
  • Which products or services lose money?
  • How do the products or services compare for profitability?

How do I use it?

In order to assess your product profitability you need to assess each product individually. So whereas the previous technique needed you to look at each customer individually, this time you need to assess the product. This will require a thorough assessment of costs.

This can be quite tricky because in every business there will be similar products or services that share production processes or cost bases. It can also be quite challenging to split and apportion costs where economies of scale have influenced costs. This technique will however only really be useful if you find a reliable and fair way to apportion costs to your various products.

Practical example

Take a mobile phone company for example. The business may produce and sell 20 different models of phone ranging from a basic smartphone with simple display through to state of the art smartphones that can do anything except make you a cup of tea.

If you were to look at revenue and the profit and loss statement you would see that the company is doing well. Smartphones are popular and the market is buoyant. Most people like to upgrade their new phone frequently so it’s a strong ongoing market.

But the company doesn’t know which of their phones are making the most money. They know which models sell best in terms of volume sold but have never assessed product profitability.

By implementing product profitability analytics the product manager is able to identify one product category that outperforms the others. In addition he identifies one category that is consistently losing money. Although one model sells well, it’s high spec and that end of the market is crowded. Competing with big, established brands such as Apple is tough. Plus the technology is evolving rapidly, which means heavy ongoing R&D costs.

The simpler smartphone on the other hand is selling almost as well but has a far higher margin and less competition. Aimed at an older audience or starter smartphone this product has found a niche and is profiting from the niche.

In addition detailed product profitability analytics allows the product manager to see where the costs arise for each product the company sells and use that information to alter the production process or operations to minimise costs or drop the product from the range. These insights also impacted marketing and advertising as a new push toward the older customer helps to establish that model as a cash cow. Knowing more about what is happening with each product also allows the sales department to up-sell and cross-sell at appropriate times after the initial sale or sell additional products that were complimentary to the cash cow product. For example they developed a simple, easy-to-use tablet that complemented the phone and was an easy sell to existing happy customers.

Tips and traps

Don’t automatically apportion operational costs equally across all products, or arbitrarily attribute costs without really digging deeply into how those costs should be allocated. Arbitrary and inaccurate cost allocation will skew the results and render the whole process pointless.

And watch out for loss leaders. Some products may lose you money but their purchase leads on to more profitable purchases. A customer may, for example, buy a cheap pay-as-you-go phone, but that may lead on to a contract phone and broadband purchase. Be sure you know the full story before taking action on a particular product.

Further reading and references

To understand more about product profitability analytics see for example:

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