Improve Profits by Assessing Your Product Mix

Improve profits by assessing your product mix

With the increasing rate of change, in two years your product or service lineup will be some combination of your current offerings and newly-developed offerings. For most businesses, we believe that mix will be 50:50.

You have probably heard of the Pareto Principle, commonly known as the 80/20 rule. It is often used to describe the relationship between a company’s customers and its sales, but it applies to product portfolios as well. Each product or service offering has a core product, commonly referred to as the substance. This core normally drives 80 percent of your cost, but delivers only 20 percent of the impact. The product surround, on the other hand, drives merely 20 percent of the cost but contributes 80 percent of the impact.

Is your strategy focused on the product core or the product surround?

Companies often pay greater attention to the product core. However, considering the cost/impact ratio I described above, you are better off focusing on the product surround. The product surround is where customer value comes from. It is harder to define because it often includes intangible benefits like peace of mind or self-esteem.

Consider a BMW motor vehicle; what is its product surround? BMW owners typically cite quality, reliability, style, retained value, and image as key benefits. These benefits are difficult to quantify and take decades to develop, but they also contribute to long-term, loyal customers.

Do you know the short list of your products – the 20 percent – that contribute 80 percent of your sales or margins? How about the 20 percent that contribute 80 percent of your team’s job satisfaction? Conversely, can you list the 20 percent that contribute to 80 percent of your problems? Compare these lists, and you will probably have a good picture of which products will succeed and which will fail.

Another valuable exercise: Can you define the core and the surround for each of your current products and services? Can you identify what it would be for your future products and services? Which of your products will still be in your portfolio in two years? Which ones won’t make it? How much re-engineering will be required?

Robert Olszewski, Kreischer MillerRobert S. Olszweski is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.    

 

 

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