How can you use product costing to identify your most profitable products?

2 Why is product costing important?

Product costing is an essential process that helps you understand your cost structure and profitability, optimize your pricing strategy, improve your marketing strategy, and enhance your production strategy. Knowing how much it costs you to produce and sell each product can help you determine your break-even point, profit margin, and return on investment. Additionally, you can compare your costs and profits with industry benchmarks and adjust your prices accordingly. With the data from product costing, you can focus your marketing efforts on promoting the most profitable products to your target audience. Furthermore, you can use the data to create compelling value propositions and unique selling points for your products. Finally, product costing can help identify and eliminate any waste, inefficiency, or overcapacity in the production process by knowing direct and indirect costs. This also enables you to optimize inventory management, supply chain, and quality control.

3 How to use product costing to identify your most profitable products?

To use product costing to identify your most profitable products, you need to calculate the total cost of each product by applying the product costing method that fits your production process and allocating all direct and indirect costs to each unit. After adding overheads and markup, multiply the selling price by the quantity sold to get the revenue per product. Subtract the total cost from the revenue to determine the profit per product. Rank these products from highest to lowest in terms of profitability and calculate the profit margin percentage by dividing the profit by the revenue and multiplying by 100. Analyze the results to identify which products are generating the most and least profit for your business. Additionally, look for any patterns, trends, or anomalies in your product costing data that may be present. For instance, some products might have a high profit margin but a low sales volume, or vice versa.

4 How to leverage your most profitable products?

Once you have identified your most profitable products, you can leverage them to increase your sales, revenue, and market share. You can cross-sell and upsell other products that complement or enhance them, bundle and package them with lower profit margin or higher demand items to create more value and convenience for customers, segment and target customers based on their preferences, needs, and behaviors, and test and innovate your products to keep them relevant, attractive, and competitive. For example, if you sell laptops, you can offer accessories like bags, mice, and keyboards; if you sell coffee, bundle it with mugs, filters, and creamers; if you sell clothing, segment your customers by age, gender, style, and occasion; and use customer feedback, market research, and data analysis to make improvements to your products.

5 How to improve your least profitable products?

If you have products that are generating low or negative profit for your business, you need to take action to improve them or eliminate them. You can reduce costs by finding cheaper suppliers, materials, or labor, or by streamlining your production process and eliminating any waste or inefficiency. Additionally, you can increase prices by adding more value, quality, or features to them, or by creating a stronger brand image and reputation. Repositioning or rebranding your least profitable products is another option; you can change their name, design, packaging, or message to appeal to a different or larger customer segment or niche. However, if your least profitable products are not worth improving or are losing market share or demand, you might consider discontinuing or replacing them with new or better products. Product costing data can be used to evaluate the feasibility and profitability of launching new products or modifying existing ones.