Strategic Planning: Identify Your Best Products and Services
Unfortunately, many organizations produce unprofitable products and services for a variety of valid reasons. Strategic planning is about driving the right decisions, based on facts, even if they’re unpopular or political land mines. Read on to learn how to factually assess your products and services to ensure that you have winners.
Determine the period of time for your review before you start. You may choose to look at last year’s performance alone, but it may not provide you with enough history. If possible, look at how each product and service has performed over the past three years.
Before you start on this exercise, remember that some products or services may still need to prove themselves and others may be integral to another item in your portfolio. And some clients generate enough revenue that they help even out work flow.
So while you assess the profitability of each product or service, pay attention to how it interacts with the rest of your portfolio. In some instances, it may be enough for the product just to contribute to overhead costs.
Open a new Excel spreadsheet and determine your winners and losers by following these steps (an example is shown in the figure):
Create a column, starting with Column B, for every primary product or service (or client) you provide.
Label the first line in Column A “Sales,” and then list all the expenses down the left-hand side below sales.
List all expenses directly related to producing the product or service (also called cost of goods sold), and then label the next line “Gross Profit.”
You can include all the components of selling and marketing each of your products or services, such as advertising, marketing, commissions, royalties, and so on.
Fill in each line on the schedule for each product or service.
You may have to do some digging because some numbers may not be readily available. If you can’t find the number, make an educated guess. Make sure that when you add up the columns, you end up with numbers that agree with your income statement.
Add all the expenses lines and subtract this sum from your sales line to determine the gross profit for each product you sell.
You may be shocked to find a lot more of your products, services, or clients have a negative or smaller gross profit than you thought.
Repeat this process for each of the past three years.
Add the gross profit lines for each product and year together. Use a separate spreadsheet for each year.
Identify which products, services, and clients are winners and which are losers.
Are the winners’ profits growing, staying the same, or declining?
The larger the gross profit, the bigger a winner it is. Refer to this figure to pick out which products, services, and clients this company should keep and which ones it should eliminate.
Service companies may want to evaluate your service lines and your clients. Which of your larger clients are profitable, or winners, and which are losers? Follow the same preceding steps to make this determination.
Consider eliminating those products or services that are losing money or firing clients that are losers (not losers themselves, but who aren’t making you money). Look at how much money you can immediately put to the bottom line by not engaging in activities that are losing money.
Don’t forget that some products may experience seasonality issues and some may be complementary products or services. Evaluate your findings with your specific business issues in mind.
Another option is to consider raising the prices of products, charging higher service fees, or increasing rates to your clients. The key is to not get caught up in trying to save something just because you or your staff likes it or because you think you should be able to make money on it. Know when to cut your losses.