Jul 19, 2010
Do you know where you make your money? Do you know which of your products and services are most profitable and which are marginal or even lose money? If you think you know this (and you should!), are you sure your data is accurate? When was the last time you updated or reviewed your product cost information or your job routings and bills of material? Are you making bad decisions because of faulty data? Although some businesses may offer “loss leaders” for competitive reasons, this must be done consciously and not very often if you wish to stay in business.
I worked for a turnaround company that had a severely deteriorating gross margin, was hemorrhaging cash, and had been put into the workout group by their bank who was threatening to force them into bankruptcy. We needed more gross margin quickly. The first thing we did was to sample some of the higher volume products to ascertain the quality of the cost data. We found some problems and fixed the costs as quickly as possible. Next, we analyzed all the products and services the company offered, sorting the offerings by gross margin percent and gross margin dollars. For goods and services below our gross margin target, we developed a “losers list.” The losers list was comprised of those products and services with an insufficient margin and which were not “loss leaders,” consciously decided. We agreed the losers had only three possible dispositions- increase the selling price, decrease the cost, or drop the product. Utilizing this discipline, we were able to increase the earnings of the company nearly 400% in less than two years. This increased profitability dramatically improved our bank relationship and allowed us to invest in new product development, further improving our competitive position.
Although this is basic blocking and tackling, the number of companies not doing this is absolutely incredible. Analyzing your losers list could result not only in increased profitability but should also lead to additional strategic opportunities. If you cannot make a product profitably, perhaps you should de-emphasize or eliminate that product line. Alternatively, if you have certain products that command a high margin in the marketplace, you should consider expansion into those areas. What competitive advantages do you have that result in good margins and how might we further exploit those advantages and opportunities?
Do you believe your margins?
Have you reviewed your losers lately?