Level Up with Product or Service Profitability Measurements
Why You should Track your Product or Service Profitability
So, you have your basic financial reports and regularly review them. Do you stop there?
On a recent podcast interview with Sami at The First Click, I was asked, “[If they are already doing the basics with financials, what are business owners not asking the question about that they should?]. We had already talked about the accuracy of data and some of the great metrics like this one.
The answer: business owners need to ask themselves, what’s the next level of understanding my numbers? If you already have accurate accounting data [a must], then product/service profitability is likely a valuable next step.
Do you know how much money you get to keep from every sale you make? I’m not just talking profit and loss report organized by Job or Class or Location. I mean, how many hours go into delivering this product and service every time? What tangible items are resold? This includes all the money brought in, all the discounts given, all COGS (cost of goods sold or cost of service sold), AND the portion of things you normally call “expenses” on your chart of accounts that make this product or service happen. Blending the COGS and the expenses like this to include time is something often overlooked.
Why does it matter? To prove that your product or service is viable = you are not losing money. To require thought about ALL of the things that go into your offerings. To replicate what you are doing well. And, so that you can stop offering what isn’t working or going to help you reach your goals.
If they are standard products or services you always offer – update these cost structures annually and include on your tariff. If not, spot check with clients occasionally and make sure you’re meeting your target margins.
When working on financials, always ask, “What could I be doing better?” or “What’s the next level of understanding my numbers ?”
There is a common myth that the only way to generate more profit is to increase your revenue or reduce your overhead. The part of business that I focus on, is in operating more efficiently. How can you deliver your same superior product but in a way that is most profitable (efficient and most effective)? How can you keep more of every dollar that you bring in through sales?
The answer to these questions isn’t found overnight. There is usually one piece of the pie that needs more detail or research. Like how much time do I actually spend on proposals? How long does it take to communicate and answer client questions? Could I reduce my merchant service percentage and what impact does that have on my profit?
The most common factor that is left off of people’s calculations? Time.
Think about all of the real costs that go into providing something. Many people in time-based business underestimate what it takes to deliver.
This is your time or the time of whomever it is that has to write the proposal, send the emails, communicate the logistics, and deliver the final product. Anything past the initial meeting and agreement that they want what you are offering should be included.
Do you know how many leads you need to meet and talk to so you can reach your budget goals for the month? Understand and track these numbers and determine what you can do to impact that end result. What if you change one part of the equation like price? What if you change them all?!
Use this equation to help figure out your profit equation. It is an adaption of a tried and true method called the five ways created by ActionCOACH.
Once you understand what your products and services are really worth you can start to see some patterns or ideas emerge. Should you replicate one revenue stream that is really profitable? Should you discontinue another that isn’t? As you do this, keep in mind whether these align with your vision, mission, and goals. Maybe the end result you provide your customers is spot-on but it just can’t be done the way you’ve been doing it. You can’t help anyone if you are riding the struggle bus.
How do I know?
I’ve done this process before. In a previous job [many years ago] we had to create cost structures for tours. When we saw how much time we were spending and money we were losing we made huge changes. We had to. And it saved the business. We no longer worked long hours for things we didn’t get a return on. We created efficiencies in our systems that allowed us to replicate time guzzling processes. And we RAISED prices before the recession on tours we knew people would always buy.
I see it over and over with businesses and non-profits. You think you know how profitable your products and services are until you do the work. It doesn’t have to be done every day or even every month but figure out a timeline to spot-check your hunches. You may just be surprised.
When thinking about strategy for your business, product and service profitability calculations can take you to the next level.
Ask, what’s next in understanding my numbers?
Measure time and other expenses involved in the delivery of product/service
Make adjustments to offerings for more profit – become more efficient and more effectively deliver
Understand how your products/services fit into your profit equation
Make sure what you’re offering fits into your plan
Celebrate success and repeat your testing and measuring