You've been selling Products A, B, C, D, E for 8 quarters.
You calculate your profit margins for each product for those 8 quarters:
- Product A: 32%
- Product B: 5%
- Product C: 38%
- Product D: -12%
- Product E: 24%
What do you continue selling?
Quickly, your bad-self realizes:
- "Hey! We're losing money selling Product D!"
So, you quickly and correctly eliminate Product D from your list of offerings.
What about those other 4 products that are profitable?
First, understand the meaning behind profit margins -- something seemingly easy to understand but seldom used as a strategic tool.
It's a reason why when you walk into the typical small business store, you're confronted with 99868075699569965 product/service/menu options.
What do profit margins tell you?
Profit margins tell you this:
- For every $1 I spend, I make X.
For instance, in the above example, you make 32 cents for every $1 you invest into Product A.
Now, unless you're Master of Disaster, you want to invest into products that give you the highest return on your investment.
If you pour $1 into Product B, you make only $0.05.
Peep that comparison on a grander scale with a $2MM investment into each product:
- Product A will net you: $640,000
- Product B: $100,000
The simple moral? Invest more into those that give you the highest returns -- and more importantly, eliminate the dead weights so you can invest more into the biggest profit earners.
But wait! There's more!
You might go off and tempt yourself:
- "Hey! Product C gives us the highest returns! Let's invest everything into Product C!"
While small businesses that focus on selling anything and everything make chump change, and those that focus solely on one single high-earning product make good dough, the latter business type sets itself on a much riskier path.
Lehman Brothers, Bear Sterns, Washington Mutual.
What happened? Those banks hedged their bets on what they saw as their single biggest earner: mortgage-backed securities.
When the motherfreak hit the fan as borrower-after-borrower defaulted on their loans, KABAMBAZOOKA: those banks died.
The key? Yes, invest heavily into your highest earner; but realize that market conditions can change rapidly, rendering your cash cow a coked-up ostrich that hawks Tupperware parties thinking HETHEMAN - but-he-ain't-no-man, he-a-coked-up-ostrich-selling-Tupperware.
(For instance, in the above scenario, you'd keep Products A, C, and E. If you're feeling a little riskier, you might go with A and C.)
- Rank your products by their profit margins.
- Hedge your bets on the premise that if your top-earnering product fails next month, your company will be a-ok with the other top earners.
- Eliminate the low earners (or sell the product biz division) and the sucky-suck $ drainers.
- Continually experiment with other new offerings to see if you can displace your top-earning products.
Pitch The Company's Dream Team
Posted on June 04
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