Understanding Goods & Services Profitability

One question I always ask my clients is, do they know what their most profitable service and/or product is?  If they say yes, then I ask them how they know that.  More often than not, small business owners either don’t know or if they do, they base their knowledge on a gut feel.  I’m here to tell you that your “gut feel” may be good for picking your dinner, but it typically isn’t accurate enough to put money on when it comes to understanding your business.

So why is it important to understand the profitability of your different products and services?  Following are some things that come to mind:
1.    It helps you prioritize/decide where to spend your marketing dollars – promote your high profit margin items. 
2.    When you are talking to customers and potential customers, you should be promoting the higher profit margin items as well.  These are typically your value-added goods and services.  Your customers believe in their value – be sure to highlight that fact.
3.    If you are planning to grow your business, focus on how to grow your most profitable items – don’t spend your time or money trying to grow the less profitable ones.  If they happen to grow along with the profitable ones, fine, but don’t make them your focus.
4.    What is it about your higher profit items that are different from your lower profit margin items?  Can you change something about your lower margin items to increase their profitability?  Increase your mark up, reduce their real cost, change their packaging, change your customer’s perception of their value, etc?
5.   Can you change the way you provide a service to increase the profitability of that service?  Can you hire less experienced labor for certain jobs, can you automate steps in the process, so it takes less time?
6.    Can you consolidate like items and eliminate the lower margin one(s) – do you really need to sell 15 different types of widgets or will 10 do just fine?

These are just the tip of the iceberg when it comes to what you can do with profitability information.  It is extremely powerful, so be sure your systems and records are set up to capture this data accurately from the beginning.