Introduction

“Less is more” is a maxim that has guided the minimalist lifestyle and simplified the lives of many people. This same concept applies to companies that find their product mixes are becoming bloated from too much time and energy being spent on products that aren’t producing the same way they used to, or potentially even losing the company money. Having a firm understanding of which products are driving your profits, which products are bringing customers to your doorstep, and how the components of your product mix are interacting with each other is an essential part of making sure that your business is running as smoothly and efficiently as possible.

Loss Leaders

Before we dive into all the reasons why you want to make sure your products are profitable, there is a tactic that may seem contradictory in nature. Loss leaders are products that you purposefully price low to draw in customers. These customers are intrigued by the potential “deals,” and once you have their attention, you can potentially get them to buy your high-profit margin products. Some notable examples are:

This is the most classic example of a loss leader, as everyone who has owned a printer knows the frustration of having to buy $50 ink cartridges for them to only print 10 pages. Ink companies often make their printers cheaper in price because they know that anyone who buys a printer will inevitably need printer ink as well.

The food courts situated in Costco stores are a more modern example. You can buy a hot dog and a soda with unlimited refills for $1.50 because they are expecting you to spend hundreds of dollars on your other products while you are there. This is an iconic part of the shopping experience at Costco and creates a loyal customer base because the customers feel like they are getting an unbeatable deal.

Pricing Strategies

Getting your pricing right is one of the toughest aspects of running a successful business. There is the classic conundrum: lower your prices and have more customers that can afford you, but potentially be seen as low quality, or raise your prices and have less customers, but potentially be seen as a premium product. Determining what’s best for your business is a key marketing decision that involves extensive research and testing within your customer base.

This becomes even more convoluted when you add in several overlapping products within your mix. Oftentimes, companies decide to offer a spectrum of the same product with varying degrees of features or levels of service. Two examples would be:

If you’ve bought a computer in the past few years, then you know there is a large range of features that you can pack into them; storage space, HD displays, processing power, and a long list of technical jargon that goes over most users’ heads. The more high-end you want the computer to be, the more features it will have, but the price will go up in relevant proportion. Inversely, a simpler computer will be less capable but much cheaper.

While computers show how increasing the quality of add-ons can increase levels of pricing while simultaneously creating a diverse quality level in your product mix, drink companies can show you how keeping prices relatively the same is still feasible by offering distinctive products. For example, Coca-Cola owns Minute Maid, which sells fruit beverages, and Costa Coffee, which sells coffee in the U.K. These beverages have extremely different flavor profiles, allowing them to be offered in unique demographics even though they are both priced at around the same level.

Finding out which strategy works better for you is determined primarily by what product you are selling and the customers you are marketing towards.

Product Cannibalization

When offering multiple products, the main goal is to increase overall market share which in turn can lead to higher overall profits. Products that are offered in the same market that share the same base of customers will not increase your market share and instead cause inefficiencies in your product mix. This is known as Product Cannibalization, as your products are competing and hindering one another rather than working in tandem.

Profit and Expense Considerations

Money is always on a business owner’s mind, and that should be no different when it comes down to the costs associated with running your business’ product mix. First and foremost is knowing the profit margin for each individual product. The formula to determine profit margin is (Revenue – Cost of Goods Sold) / Revenue, and then you multiply by 100 to get the percentage.

For example, imagine a toy that has $100,000 in revenue and $40,000 in cost of goods sold. The profit margin would be 60%:

($100,000 – $40,000) / $100,000 = 0.6 x 100 = 60%

This formula is the easiest part. Complications can happen when you have shared raw materials, employees working on multiple product lines, shared storage costs, and several other combined product costs. Keeping track of your cost of goods is an essential part of any business but is especially important when you have multiple products sharing resources. Having those cost breakdowns can help lead to better efficiencies, allow you to adequately approximate profit margins, and focus your efforts on the greater sources of revenue.

Pareto Principle

One of the more interesting guiding principles is the Pareto Principle (also called the 80-20 Rule). The underlying concept is that 80% of your output comes from 20% of your causes. For the purpose of your product mix, it can be interpreted as 80% of your revenue comes from 20% of your customer base. By focusing your efforts on 20% of customers, your product mix can be tailored to best capture them without the risk of product cannibalization by overly focusing all your products on them.

Conclusion

Maintaining an effective product mix requires businesses to regularly evaluate which products truly drive value and which may be draining time and resources. By strategically using loss leaders, implementing thoughtful pricing structures, avoiding product cannibalization, and closely monitoring profits and costs, you can streamline offerings and improve overall performance. Ensuring focus remains on the products and customers that generate the greatest return allows the business to operate more efficiently, while supporting long-term growth leads to a product mix that can successfully give you the profits that you deserve.

If you would like more information regarding your product mix, or you need assistance with your finances, reach out to Volpe Consulting and Accounting today!