We live in a time of abundant choice, and our customers expect options. Providing customers with a large variety of products and features is a compelling way to sell more. But, as companies grow and diversify, it can be difficult to capture the monetary value generated by the long tail of these products using traditional product management tools and data. An example of these traditional methods includes simple gross margin and product costing techniques derived from accounting systems. These conventional accounting data sets fail to account for the value of diversification and the actual cost of complexity.
It is critical that we not forget, complexity - of product and customers - will inevitably encroach on high-value offerings, hurting both customer satisfaction and profitability, ultimately reducing free cash flow.
True Profitability was designed as a pre-meditated process to ‘weed out’ your unprofitable products and customers to improve your portfolio’s fitness and solve these issues.
In a nutshell, True Profitability is a process that identifies and isolates a business’ different portfolio areas according to value and complexity, using proven and simple analytics. It applies the Pareto Rule (80/20) to divide products and customers into four areas or quadrants, based on pure contribution margin.
The four areas include the core, the ancillary products, the supporting customers, and the residual area. Each area points to unique strategies and tactics to make the core even better and turn around the residual zone. By constantly pruning, repairing, and adapting your pricing to deal with the cost of complexity, you will raise your overall profitability and maintain the long tail’s health.
In the end, you’ll have an income statement for each product, service, and customer, which will increase your understanding to control this complex multidimensional challenge. To learn how you can dramatically improve the quality of your product and pricing decisions, sign up for our Webinar on True Profitability.