Today, I want to tackle a very important concept that many business executives and managers tend to overlook:
When and how should you make changes to your product mix in order to increase profits?
When a company isn’t doing well, most of the time it’s because they aren’t adjusting their products to increase gross profits. The irony here is that most marketing professionals regard the product as the most important factor in the marketing mix.
If you’re unfamiliar with the “four P’s” of marketing, here they are:
- Product: the goods or services customers want and need, and the life cycle of those goods and services.
- Price: the amount customers are willing to pay for goods and services based on their actual and perceived value.
- Promotion: the ways in which goods and services are being communicated and advertised to potential customers.
- Place: where the products are being distributed—whether it’s online, at brick-and-mortar locations, or both.
As the product, it is the most customer-focused factor, and it offers the most direct path to sales growth. If marketing managers can determine the customer’s wants and needs, create products or services to meet those needs, and then offer them at the right price, they can increase sales.
Now, managing a company’s product mix requires a unique skill set. The manager should be adept in sales forecasting to determine how much product they should have available. This is an issue we would run into back when I worked for Coca-Cola. We would put products on sale without making the production department aware. As a result, we often wouldn’t have enough of the product during July 4th, Thanksgiving, and other holiday sales.
Perhaps most importantly, the manager needs to know when to add or remove products from their product line as customer needs change. When I’m working with a client to help them consolidate their product line, I employ what is known as the 80/20 rule.
What Is the 80/20 Rule and How Is It Used?
The 80/20 rule is a principle that can be used to help assess the effectiveness of a company’s products. In simple terms, the rule states the following:
80% of the products in a business’s product line bring in roughly 20% of its total product sales. Conversely, 20% of the products in a business’s product line bring in roughly 80% of its total product sales.
Of course, this rule is only helpful to managers who are able to differentiate between these two categories of products. How do you identify which products fall in your top 20% or your bottom 80%?
The first step is to carefully monitor your product lines. Then, at least once per year (although I recommended as often as once each quarter, if possible), gather the following sales data for all of your products or services:
- The number of total units sold
- The sales dollars generated per product
- The cost of goods sold per product
- The gross profit earned per product
Next, enter all of this data into a spreadsheet. Sort the data by each column, flagging the bottom 20% of your product mix in each list. Next, carefully evaluate each flagged product, and ask the following questions to determine whether it would be wise to remove it from your product line:
- What are the reasons for the product’s poor performance? Could its price have been too high or too low?
- Were the product’s sales impacted by a competitor’s product or a similar product in our product line?
- Could better marketing have improved the product’s sales in a significant way?
- Is the product approaching the end of its life cycle?
- Could we salvage the product by redesigning and improving it?
- Is there an untapped market we are missing out on with this product?
- Is the product a required add-on for another product in our product line?
By taking the time to analyze your sales data and ask some of these questions, you can determine whether it might be time to retire a product—or at the very least, stop promoting it. This is one of the best ways to maximize your profits without increasing sales.
Unfortunately, countless businesses get this backward. They focus on increasing sales before maximizing their profit margins when they should focus on maximizing their profit margins first!