A few years ago, I was referred by a mutual friend to the owner of a newly formed, high-end consumer products company.
When I met with the owner and a couple members of his management team, they told me of the great response the product was getting in the market yet they couldn’t understand why they were struggling so much financially. It seemed to them the more they sold, the worse it got.
My radar immediately detected the threat. Could the issue be that simple? Yes, it was.
I had them tell me about the product, the selling/pricing strategy and a bit about their manufacturing and assembly process. It was a great product with strong features and innovative design. When it got to the cost to make, the conversation immediately broke down. As I suspected they didn’t know their true variable costs. It was like they were stuffing twenty-dollar bills into each unit that flew out the door. Right, they were selling their products at a negative margin.
I’m a professional, but I sure wanted to ask them if they thought they could make up these losses with higher volume? I was afraid they might answer in the affirmative.
Needless to say, we did a deep dive into the actual costs of manufacturing and reviewed all the overhead costs. It took a while, and we turned the company around by putting a lot of attention on variable cost reduction, labor efficiency gains and reducing overhead. Because the product was so popular, we were able to raise the price significantly.
By the next year the company was highly profitable and all was well (at that moment).
Years ago, I saw a matrix of product profitability vs popularity (volume). This approach works well when you have many offerings like in a restaurant or retail; the suggestions have merit in most service and product companies.
Imagine four quadrants with profitability down one side and volume across the top.
- Top left: profitable and popular: Promote and feature; this is your bread and butter.
- Top right: profitable yet not so popular: Marketing opportunity?
- Bottom left: not profitable and popular: Raise prices and/or reduce variable costs
- Bottom right: not profitable and not popular: Eliminate this product
Oftentimes a company’s performance can be significantly improved by eliminating or fixing the non-performing services or products. Goes for team members too if you have a direct way of measuring performance. It can be that simple.