Neglecting to Analyze and Understand Margins
What are your margins per product or service?
That is, what is the gross profit you make on each sale? Most small business owners can only offer an educated guess.
They spend all of their time worrying about their overall growth in revenue and don’t consider the profit per product (or service) or the amount of effort necessary to deliver that product to the market.
Why is this focus a problem?
Consider the following example for ABC, Inc.:
Totals Sales $ 1 million
Net Profit $ 100,000
Product Breakdown:
| Sales | Profit | Margin | Effort | |
| Widget A | $700,000 | $50,000 | 7% | 70% |
| Widget B | $200,000 | $20,000 | 10% | 20% |
| Widget C | $100,000 | $30,000 | 30% | 10% |
When asked which product is the most important to his business the typical business owner will immediately replay Widget A because it represents by far the most sales. However, a closer analysis reveals that the margin on Widget C is 4 times the margin of Widget A. In addition, Widget C requires far less effort (resources necessary to deliver to the marketplace) than either of the other products.
The best thing that this business owner can do is to shift resources away from Widget A and B and figure out how to sell more of Widget C.
- What is your most profitable product or service?
- Do you focus the majority of your effort on this product or service?
- If not, how much money are you leaving on the table?
