Business profitability: Why you should take the dog for a walk

How to optimise the mix of products and services to maximise success.

An optimal business offer not only drives financial success but also enhances guest or client experiences. This makes product and service analytics a key aspect of our business strategy. That's why we should be committed to understanding how our products and services are performing—and what we can do to improve them.

By collecting data on item cost, selling price and number of sold items (products and services), we can be sure to accurately identify the best and worst performing items as well as the profitability of each item over the lifespan of our deliverables.

This will assist us in developing an action plan to optimise our products and services, for example by reducing low profitability items and increasing the popular ones.

How it all works

Let’s examine a simple yet highly effective product and service analytics model that we can use to find an optimal balance for our business offers. Whilst we could be tempted to simply cut out the underperforming products or services, this might not always be best for our overall business success. This model teaches us to carefully consider the mix of stars, puzzles, plough horses and dogs, which leads to reduced costs and improved profitability without compromising on clients’ needs, wants and desires.

Dog: Low profit, low popularity

Plough horse: Low profit, high popularity

Puzzle: High profit, low popularity

Star: High profit, high popularity

Keeping an eye on the category matrix

Items can (and do) continuously switch between categories which is why it is crucial to keep a close eye on where our services and products sit. This is particularly important in today’s fast-changing climate and the shifting demands, desires and popularity.

Let’s look at the different categories, using the example of the life of a mobile phone.

Let your STARS shine?

In general, when a new mobile phone is released, there is a lot of anticipation to own that gadget with new features, better camera, enhanced screen resolution etc. People are willing to pay a top price for the product which results in a star category (high popularity/high profitability).

Stars present an easy opportunity to make the good even greater. We should be promoting this product or service in any way we can (for example through social media or highlighting the offer on the website, catalogue or brochure) to boost sales even further.

Solve the PUZZLE

After a while, the hype fades away which negatively impacts the popularity of the product, and we will witness a reduction in sales. Therefore, the item is turning into a puzzle (low popularity/still high profitability).

To leverage from our product as long as possible, we can tweak a few aspects to increase sales. We need to solve the puzzle for example by reducing the price, which obviously affects profitability, but on a positive note attracts a different market that likes the product but is unwilling to pay a top price.

Let your PLOUGH HORSES gallop

The above decision to reduce the price will move the phone into the plough horse category. The product spikes in popularity once again through the willingness to reduce the original profitability (now high popularity/low profitability).

At this stage, we should let the plough horse gallop as long as possible and maintain high volumes. Of course, we can try to improve our profit margin by reducing costs (packaging, postage, labour etc.). Inevitably, the time will come for the plough horse becoming tired, and the service or product will fall into the last category.

Let the DOGS take a walk

Usually, when a new phone is released, the old version loses its appeal because of today’s demand for the latest technology. At this point, the item will no longer sell well, even at a low price. The item is now a dog (low popularity/low profitability), and it is time to let it take a walk. In other words, take the product off the market even if it is a tough call to make. We can fill the void of the eliminated dog with a new offer based on:

• What we love doing
• Our area of expertise
• What the world needs; and
• What people are willing to pay for

While the exclusion of dogs is generally recommended, common sense must prevail, and we need to strike a balance. For example, if we have a fundamental product that draws people in or is a necessity for our business, it serves a different function, and we might have to keep it on offer despite its poor performance.

Analytics and formula cheat sheet

First of all, let’s acknowledge that service and product analytics is far from an easy task. It is, however, crucial to gain clarity around profitability of our current deliverables by looking at data and hard numbers and taking our personal preference or attachment out of the equation. This will allow us to make educated and powerful decisions.

To perform product and service analytics, only three pieces of information are initially required about each item:

1. Sales price
2. Item cost
3. Items sold (or forecasted sales) for a specific period

Formulas

¨?Item contribution margin [CM] =??Sales price?-??item cost

• Average item CM =??Sum of all item contribution margins??÷??number of different items

This is used to determine profitability. Item CM higher than average is categorised High; item CM lower than average is categorised Low.

• Average items sold =??Sum of all items sold???÷??number of different items

This is used to determine popularity. Items sold higher than average is categorised High; items sold lower than average is categorised Low.

• Totals =??Individual sales price, item cost, or item CM??X??number of items sold
• Total CM share [% per item] =???????????????????Total CM per item??X??100?????????????. ????????????????? ??????????????????????????Sum of Total CM per item [includes all items]

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The following table illustrates an example of a completed product analysis.

Category analysis legend - CM: Contribution Margin??|??IS: Items Sold

We can use these formulas to analyse and categorise our own products and services as a basis to make decisions about where our offerings currently sit, and the next steps we should take.

Business offer overview

Once we have identified both the profitability and popularity of our services and products, we can use the following simplified matrix to list and visualise the position of all our deliverables.

Conclusion

Having an appropriate combination of stars, puzzles, plough horses (and dogs) are essential elements in offering a balanced range of value propositions. Keeping a close eye on our items on offer can tell us what's trending and why. It also assists us in comprehending the significance of cost and price. And due to clients’ changing preferences, as well as the volatility of economic and social situations, this is a dynamic task.

Therefore, it is essential to regularly perform this product and service analysis and make smart decisions to stay ahead of the game.

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This blog post first appeared on the PROfound Leadership blog .