Products & Services

Our products are getting a bit old. What should we do?

How can we extend our products so we're not so dependent on our key item(s)?

Are our gross margins still acceptable?

How well do we order supplies?

How can we make our products unique?

Do we have secure rights to sell our products?

Product Life cycle

How attractive is our key product or service (group) offering in terms of the product life cycle?

Revenue dependency

To what extent do a limited number of products or services dominate our revenue?

Product profit margin

Is the gross margin we make from each product or service (group) attractive?

Production and inventory

How well do we manage our inventory, including tracking inventory location?

Do we have a rational purchasing system with economic order quantities identified or is our purchasing random and as needed?

How well do we manage production of products or services (lead time, on-time delivery, resource management, workflow management)?

Do we have a full activity costing system in place?

Core differentiation

To what extent do our products or services provide us with a unique core differentiator?

Product security

How secure is our right to sell our product or service, i.e. do we have distribution rights, do we own the intellectual property, do we have a franchise?

Analyse product profitability

Is the gross margin we make from each product or service (group) attractive?

The profitability of a product is typically defined as the gross margin made on the product (sales price less cost of goods sold per unit). That is not the only measure of profitability, however, and other measures should be considered when estimating the relative profitability of each product or product group, such as average transaction value, inventory turnover, and return on investment.

It is important to capture not only revenue by product but also average transaction value as it may be the situation that it is necessary to sell more of Product A than Product B to realise the same gross profit due to higher costs associated with Product A. As an example, retailers often use loss leaders as an initial attraction for customers with a view of boosting overall sales and software companies typically have low margins on the actual license sale but earn their profit from subsequent support and upgrades.

Inventory turnover and return on investment (ROI) are important as indicators of the amount of cash tied up in a product which might be better put toward developing a faster-turning, more profitable product.

By gathering sales, cost, and inventory holding data, it is possible to assess possible improvements to overall profitability by changing the sales mix.

TIME TO COMPLETE: 1-5 weeks depending on product range and recording history.


Step 1 - Review product range and product groupings

Analyse all current product offerings listing:

Product name
Nature of the product
Type of sale - e.g. low value / high volume / instant, high value / low volume / intensive, personal sell
Target market
What it is designed to do, and
Anything else considered relevant, e.g. used as a loss-leader to higher-margin related items

Where appropriate gather products into groupings. (Review product range and develop product groupings if not already carried out.)

Step 2 - Collect pricing and sales data by product group

Analyse each product or product grouping, summarizing the following information:

Total sales for each product / group
Total number of items sold for each product / group
Average transaction value for each product / group

Step 3 - Ascertain unit costs associated with producing and holding each product

Analyse costs associated with each product or product grouping, summarizing the following information:

Total costs of production for each product / group - this may be difficult so use assumptions initially if necessary. If the prima facie results justify further investigation undertake it in a subsequent phase of work, e.g. activity-based costing.
Average inventory on hand of each product / group

Whilst this is intended to calculate gross margin only, take note of any products or groups that have a particularly high or low cost of sales and marketing associated with them.

Step 4 - Analyse profitability by product grouping

Calculate the following product profitability measures:

Gross margin %
Gross profit per unit sold by product group
Inventory held per product group as a percentage of total inventory held
Inventory turnover days by product group
Return on investment by product group (calculated as gross profit / average inventory held)

Step 5 - Draw recommendations from the data

Look at the raw data. Consider additional costs that might be generated, (e.g. selling costs, inventory holding costs, customer service costs).

This Action Step is primarily concerned with trying to increase margins by reducing costs or increasing volumes rather than through price changes. (Review pricing and product cost in that regard.)

Consider whether you could free some of the cash tied up in stock of one product to push sales of a more profitable product. Consider whether inventory could be reduced generally, whether any low value / high production cost features could be varied etc.


A report analysing the profitability of each product or product group, with recommendations as to how overall profitability could be improved through:

Changing the sales mix
Changing product features
Reducing inventory levels
Reallocating costs to give more accurate data by product

Ensure that any recommendations have timing, responsibility and potential financial benefit included. Also, if further analysis is required, identify it and document the need.


Review the profitability of all products.

Analyse the current system to determine if it can be used to pull together profitability based on readily available information.

Be aware of all the costs involved with the development of a product.

Think through all aspects of a product's impact on the business, e.g. as a loss leader.


Assume products only fit into a specific customer base.

Use simply gross profit by-product as a measure of profitability.