In past newsletters we’ve focused on finance, marketing, getting out of debt, sales, and establishing a sustainable growth rate, so it’s time to look at your product line. For some, the statement “more is better” sums up their philosophy on an effective and profitable product line. But that mantra is missing a key word: profit.
To maximize your resources and profit, regularly review your product line and note your low-profit-margin items. Continuing to carry low-profit-margin items in your product line will depress your profits and hold your potential profit margin down. Typically, these items use up valuable (and perhaps limited) resources that could be more profitably used elsewhere.
Tom Monaghan, founder of Domino’s Pizza, tells this story about his first pizzeria:.
“One night, most of my employees didn’t show up, and I didn’t know whether to open or not. Someone said, ‘Why don’t you just cut out the six-inch pizzas?’ We had five sizes, but most of our business was the smallest, the six-inch. It took just as long to make as the big one and just as much time to deliver, but cost less. We never got busy that night, and yet we made 50 percent more money than we ever had. The next night I cut out the nine-inch pizza, and all the bills caught up. I learned then that keeping things simple could be more profitable.”
Business owners should continuously ask themselves two questions:
- How do I increase my business’s most profitable activities?
- Is it really worth it to maintain the low-margin activities?
Sometimes a business owner can be too involved in the daily operations to find the time for review and evaluation of their product line profit.
CFO-Pro can help business owners sort out the low-margin items.