Small businesses can use practices that their bigger counterparts implement. One of which is product profitability analysis. This method provides you with insights about the profit a product can generate for your growing company. This data-driven strategy can provide you with a competitive advantage as you navigate the competition in your niche. It also provides you with benefits such as insights about customers and your products, ways to improve a product, and identify ways to reduce costs.

Here are some product profitability analysis methods you can implement to improve your small business.

Learning about the Margins

The profit margin of a product is a determining factor in the value it provides your small business. Identify ways you can reduce the cost of producing an item without sacrificing quality. Doing so increases the revenue a product creates and provides you with more resources to grow your business and reach more customers. You can cut operational and production costs by removing redundant tasks and processes, improving energy efficiency, a streamlined checkout process online or in-store, and decreasing shipping costs just to name a few.

Market Testing

Test and conduct surveys about the best possible price for your product. The ideal pricing generates profit while reducing costs. You need to identify a number that customers are willing to pay for a product or service. Some of the ways you can implement to determine a price for your product include: the prices your closest competitors have established, the price of a similar product online, conducting product research, and trends in your niche.

Identifying Costs

Proper management of your small business’ finances includes identifying costs. Determine the expenses of developing, producing, releasing, and marketing a product. Doing so allows you to understand the real cost of each product in your portfolio. You can then identify which fixed or variable cost you can reduce to maximize profit. Some of the costs a product will incur include inventory, warehouse or storage fees, in-house and outsourced labor costs, loans, and use of equipment are some expenses that factor in costing and potential profit.

Assessing Profitability

Regular price assessment of products allows your team to remain informed about the profitability of the items and services in your portfolio. This enables you to determine which items and services are meeting your expectations and which ones are underperforming. It also enables you to put them in categories such as “core product or service”, “probationary”, or “growth potential.” Categorizing your portfolio allows you to allocate resources effectively and focus finances on items and services that are profitable.

Reviewing External Factors

Factors beyond your company’s control can have a negative effect on the profitability of the products in your portfolio. Some of the factors you should consider in your planning are the competition for it, the shifts in the market and demand, and available shelf or storage space. These can reduce your margins to just break even or lead to losses.

Extensive Documentation

Documenting success and unsuccessful products saves your company time and resources on items that are unprofitable. The data and documents you gather provide you with information on steps you need to take to avoid making the same mistakes and building on the success of products in your portfolio. Documentation from every aspect of your small business enables you to establish goals and determine targets to maintain or improve the profitability of your products.

These product profitability analysis practices provide you with guidelines whenever you plan, develop and market products. These enable your team to maintain the profitability of the products you release. We at Robookkeeper can help you update your accounting books so that you can focus on your growing company. We offer first-rate accounting services for small business owners.