Unprofitable Products and Services Analysis

Answering the question - What is the most and least profitable products in my inventory?

If you have more than one product or service, then any analysis will determine that one is more profitable than the other. If you have a lot of products in your offering, then you can bet some of them don't make any money at all. The trick is to discover which they are and then putting plans into motion to remove them. The basic tool for doing this is a sortable list that ranks all your products and services showing total revenue and all direct costs and the gross profit.

The problem for most retailers is that even small ones have SKU's numbering in the thousands. The only answer here is to do some data mining and figure out the total sales dollars and total costs for each product. This may require a major overhaul of how your accounting system reports these items. However, a list of all your SKU's, sorted by profitability, is essential information for superior profits.

The costs that need to be attached to products are not only their direct cost, but their individual shrinkage rate. Some products are more prone to theft than others, so spreading the shrinkage rate evenly over the entire inventory is a mistake that will lead you to possibly drop products that are really profitable. Also include any special handling or warehousing costs that you can identify.

What will this list of products tell you about your products? For most businesses with a lot of products, you will be surprised to discover that the bottom group doesn't produce any profits at all. Profitability increases simply by not offering them anymore except with a special order and additional charges. Reducing the amount of SKU's also reduces the amount of money you have invested in inventory and improves your cash flow. Not a bad result for simply sorting a list of SKU's by profit.

Service providers have a simpler, but no less crucial problem, when it comes to figuring out what services are not making them money. My favorite profitability report as a service provider lists all of our services, the cash collected from those services, and the time applied to the service. Divide the cash collected by the total time applied gives me a very good estimation of the profitability of each service. My report shows month, year-to-date, and prior year totals for each service, but you could do a lot more.

What will this list tell you about your service offerings? It will tell you which ones you need to work on by:

1. fixing the way you provide the service, or
2. pricing the service higher until it either becomes profitable or you customer's quit asking for it.