Assessing Your Current Product/Service Offering Series

Question 1: Do you know the contribution that each product or service that you offer makes to your overall profitability?

The total sales figure for most businesses and services consist of a mix of the various products and services that they sell, each of which will cost different amounts to produce and will have different sales prices. What you want to know is how much each individual product or service will add to your overall profitability.

Consider the following example:

Product A sells for $100 and costs $60 to produce and you sell 1,000 units per year.

Product B sells for $200 and costs $80 to produce and you sell 500 units per year.

The contribution of each unit of Product A to your profitability is $40 (100-60)

You sell 1,000 units and so the overall contribution to your profitability by Product A is $40,000

The contribution of each unit of Product B to your profitability is $120 (200-80)

You sell 500 units and so the overall contribution to your profitability by Product B is $60,000

Why is this information important? Well if we just consider volume of sales, we would concentrate our efforts on Product A. However, even though we sell fewer units of product B they contribute more profitability to our business and we would be further ahead if we could raise the volume of sales of Product B. This example is fairly obvious but when we have many products and services it is not quite so obvious.

This type of analysis is important because most products and services are subject to the product life cycle and sales will decrease over time. If we have limited financial resources, we want to invest in the products that add the most to our bottom line and drop the poor performers. It also enables us to identify those products or services where we can reduce our sales price if our competitors introduce a comparable product at a lower price.

There are many other ways in which we can use this analysis to analyse your sales patterns.

If you would like more information, please contact The Joyce Group Inc. at info@joycegrp.com

Keep an eye out for next week's question on assessing your current product/service offering series.