If you run a company that produces, distributes, and/or sells various products or services, it’s crucial that you identify and understand the profitability of each of your individual products.
Operating without this knowledge puts you at risk of making flawed business decisions.
Now remember there can be a difference between your top selling and most profitable products. You can sell 100 products at 20% profit and 60 products at 40%; with the second being the most profitable.
The reason for this question goes back to the 80:20 rule. If 20% of your products give you 80% of your sales your business will be in trouble if you are out of stock of these 20% of products. Knowing which are your top sellers as well as the most profitable products you are able to do the following;
Ensure that the top 20% of products are in stock at all times. This does not mean you must neglect the other 80%, but you must ensure that you are not overstocked with these products. Make sound business decisions regarding your products and product lines that will improve your business’ overall profitability.
Target marketing strategies to optimize your customers’ exposure to the products with the biggest profit margins. Know which products will help you focus on your company’s growth and which products you have to consider eliminating. Most importantly, knowing what your most profitable products are and using that information to modify your marketing, inventory, and pricing, allows your business to thrive and your bottom line to grow.
In most businesses, 20% of customers account for 80% of a company’s margins, so there is huge value in knowing who the 20% are! Remember a customer that purchases the most from you does not mean they are the most profitable. Their prices could be discounted and the delivery costs could be high.
One of the best strategies for increasing your sales revenue is targeting your most profitable customers that have the biggest growth potential. It's a good idea to focus on customers that provide high sales and high profit. However, customers that provide high profit on low sales can also help boost profits.
If customers are providing low profit from high sales, you should think about adjusting their pricing to see if you can generate more revenue from these sales. It may not be worth focusing any efforts on customers who generate low sales and low profits.
To increase profitability and grow margins, a company has to ensure its retention activities are focused on profitable customers. In fact, acquiring a new customer can be more expensive than retaining an existing customer.
The bottom line is you must never get comfortable with your best customers. Continue to make them feel special, listen to what they are saying and deliver top notch service.
Always remember revenue comes from selling products or services to customers. Your overriding responsibility is that you ensure you sell as many profitable products possible and maintain your most profitable customers.
John Mason said - “The most unprofitable item ever manufactured is an excuse.”