You’re selling too many products. Really, you are. Don’t believe me?
According to Strategex, a business operations consulting firm, about 25% of the products sold by the companies they work with generate 90% of those companies’ revenues. By contrast, the bottom 50% of products only generate about 3% of revenues.
This is a common thing. I see it with many of my clients. They sell long lists of products, yet only a select few are making them any money.
I’m betting that your business is the same. I’m guessing that 75% of your products are only generating about 10% of your sales. If that’s not the case, then good for you. If this is the case, then you need to make some changes. Focusing on only your most profitable products isn’t just important during slower economic times. A lean product approach benefits your company all the time. Why?
For starters, it’s the best way to manage your resources. You should only create and deliver the products that make you the most money. When you take this approach, you only have to purchase the equipment necessary to deliver the products and services that maximize your return on investment.
By only selling the most profitable stuff, you can also open up space in your facility and clear out the inventories of slower moving and less profitable items. Then you can potentially open up new partnership and outsourcing relationships with other companies that sell similar products. This could provide you with more opportunities.
At the very least, I recommend you perform an analysis of your product line. Depending on what you learn, you may need to take some steps to cut back on your products. Here’s how to get started.
Step 1: Identify
Take some time and analyze your data to determine which, if any, products to cut.
Most small and mid-sized businesses today are using accounting systems. Most of these software applications have reporting tools or their databases are open to integrations with third-party tools. If you’re not familiar with the reporting capabilities of your accounting software, then get some training. Or better yet, stay focused on what you do best and hire an outside consultant to do the reporting for you (you can usually find experts on sites like LinkedIn or from your software vendor).
Use these reports to determine sales by product and by year and to compare margins by product line. Also run a report of sales by customer (more on that below).
From these reports, you can determine whether the assumption that 25% of your products generate 90% of revenue holds true for your company. If so, you’ve got to decide which products to cut.
Step 2: Partner
Once you determine which product lines to cut, find someone else that sells those or similar products. Yes, these may be your competitors. But that’s OK—if there’s one thing I’ve learned over the past couple of decades, it’s that many of my competitors are also potentially good partners, particularly if they’re a small business like mine. We’re all short on resources. We’re all looking to make a buck. We’ve all got the same challenges.
See if you can cut a deal with that partner: Refer customers to them who need the products you’ve decided to cut.
Sure, you’re risking that they may steal those customers. But most people I’ve met aren’t really like that. In reality, they may send leads your way for products or services they can’t handle either. If you’re willing to risk a partnership, you may find the rewards to be significant.
Step 3: Transition
Once you decide which products to cut, make sure you’re communicating with your customers.
Be very careful that you’re not cutting a product that may be generating low profits for your company but happens to be a critical product for a big customer (that’s one reason to run sales-by-customer reports).
Make the effort to email or call customers to let them know about the product discontinuation. Be transparent. It’s no crime to kill unprofitable products. Big companies like Google do it all the time. But make sure that your customers can still get those products elsewhere. Introduce them to your partners.
Step 4: Update
Once you decide to discontinue a product line, lean into the decision entirely.
Take the time to remove that product from any marketing materials and your website. Flag that product in your system as discontinued. Drop the product from your price list and inventory reports.
This may sound obvious, but I’ve had clients that failed to take this step and have upset their customers (and prospects) by telling them that no, even though the product is listed, it hasn’t been sold in years. Failing to take this step looks unprofessional and misleading. Do your updates.
Step 5: Repeat
Cutting a product—or multiple products—from your company is not a one-time affair. Things change. Margins fluctuate. Customers come and go. Once you have a process for identifying, partnering, transitioning and updating a product discontinuation, repeat that process every year or two. Your goal is to keep things lean, mean and profitable. To achieve that goal, you must make a continual effort.
Cutting a product line can be emotional. I’ve had some clients who refuse to make a cut because the product is something they’ve sold for years, or it was the first item they ever offered.
But running a business shouldn’t be emotional. Products are assets that exist entirely to bring value and cash to your business. Giving into your emotions and failing to cut low-performing product lines only hurts your business in the long term. And by hurting your business, you’re potentially hurting the people that rely on your business.
Don’t do that. Cut. Be profitable.
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Like the article, would like to get more information re running small businesses.
Thanks for commenting, Sonia! For more tips on running your business, check out the content below:
Hope this helps!
Really interesting — does this basic assessment work for a nonprofit with 20 projects? Interesting to think about what other criteria might be important for partnering, marketing, and fundraising.
This definitely works for a non-profit, particularly because most nonprofits I work with have lots of balls in the air. So there are two ways to approach this.
The first is to look at existing, funded projects. Once committed a nonprofit generally can’t cancel, so it must be seen through. But a deep “profit” analysis has to be undertaken before renewal and if the project isn’t breaking even or generating a surplus it has to be re-considered.
The second is for proposed opportunities. A hard look needs to be taken at each one and based on the size and long term value to the organization, discussed as to whether or not it’s providing enough future ROI or if it should be abandoned so that development efforts can be more closely focused on more profitable opportunities.