Product profitability is one of the main indicators, such that every self-respecting top manager certainly wants to see in every report that he brings for consideration. At the same time, calculating the profitability of products is quite simple, because profitability is the ratio of net profit to the cost of the product. Thus, in order to calculate this indicator, you will need to profit from the sales of each product, divided by the cost, respectively, of each product. You can use the results obtained to compare and determine which products are the most profitable for the enterprise.
After you get the result as a result of monosyllabic actions, which are usually automatically performed in spreadsheets, the most important thing begins - the analysis of product profitability. What should you pay attention to at the first moment? First of all, you need to compare real indicators with planned ones. Perhaps the sales volume of a certain group of goods was not high enough, or you had to significantly reduce the price - in this case, the level of profitability of the products will be lower than expected, which indicates mainly the ineffective marketing policy of the company. In this case, you need to review it, either by increasing the cost of promoting distressed goods, or by reducing their share in relation to other goods.
If on a certain group of goods, on the contrary, you get results that exceed your expectations, then this means that such products are promising. Most likely, you should not do anything more in this direction. It’s better not to touch the marketing policy , since it works well anyway, but you should carefully increase sales volumes , because the fact that a batch of goods was sold with good profitability does not mean at all that with an increase in sales volumes, there will be buyers for all goods .
Further, the analysis of profitability of products must be continued as part of the comparison of various products among themselves. Your goal is to maximize sales of products with high profitability and minimize sales of goods with low profitability. Of course, such a replacement is not always possible, because market volumes are largely dependent on demand, but if the products in question are complimentary, then you will probably have to shift focus.
However, keep in mind that product profitability analysis is not a generator of 100% correct decisions. You need to take into account the specifics of the products that are considered in the report. For example, the drinks served in restaurants are highly profitable, while the food is low, but you can increase the sales of drinks only to a certain level, but in the future, such an increase is not possible, as people simply stop going to a restaurant that does not have food.
Do not forget that you are analyzing the profitability of products in order to identify the strengths and weaknesses of your product policy. The numbers will clearly indicate your weaknesses, and your managerial experience and market knowledge should tell you whether these weaknesses can be corrected by changing the structure of the company's products on the market.
In addition, profitability is pretty much industry specific. While in some industries even 10% is an excellent indicator, in others, if profitability drops below 100%, it is time to sound the alarm. Basically, it depends on sales volumes, and if you cannot win on profitability, then you can probably beat your competitors on volumes.