It’s a New Year!
Sharon Koehler
Stone Industry Consultant
It is the beginning of a new year and usually, at this time, I encourage you to check your internet security. Look to see if anyone you do business with has been hacked or compromised – putting your information at risk. Keep your information safe this New Year by changing passwords and pins, switching over to a VPN, and going to 2-step authentications.
You need to do all that for the exact same reasons as last year: data breaches are still on the rise, all the holiday shopping you just did, and it’s probably been at least a year since you did any cyber security updates.
The beginning of the year is also a great time to take a look at your surroundings. Make sure your showroom is up to date, your vendor catalogs are current. Purge your files, check your trucks for maintenance, wear and tear, and make sure your wraps or signs are legible and easy to read. Are your materials labeled and walking aisles clear? Check your parking and loading areas for clear signage and debris.
Whew, that’s a lot to do at the beginning of the year! However, there is more you can do to give yourself a great jumpstart into the new year. One more important thing is to check your services and products. See what’s hot and what’s not. Also, make sure you are providing all the services you need to, or see if you need to drop anything.
Check the Services and Items You Offer for Profitability
In any business, understanding the profitability of your products and services is critical to your overall success. Keeping track of which items or services bring in the most ROI (return on investment) — and which might be draining resources — is essential. Many businesses fail, not because they lack customers or a good product, but because they didn’t pay enough attention to profitability.
1. Resources
One of the most obvious reasons to regularly check the profitability of your services or items is to ensure that your resources are being used the best way possible. In any business, resources such as time, labor, capital, and inventory are limited. By knowing which products or services are most profitable, you can better decide where to invest those limited resources.
For example: If a particular service or product has high demand but low margins, you might want to reconsider how much time and effort you devote to it. On the flip side, if a product is underperforming in terms of profitability, you may decide to discontinue it or re-think your pricing, marketing and advertising.
Checking profitability helps you hone in on what’s working. It enables you to direct more attention to high-profit items or services and invest in strategies that help promote those products or services. By doing so, you can free up time and energy from less profitable offerings, making sure you’re spending resources where they’ll deliver the best returns.
2. Identifying Loss-Leading Items or Services
Loss-leaders — products or services sold at a loss to attract customers —are common in many industries. However, not every business can afford to consistently lose money on a product or service in the hopes of a future sale. By regularly assessing profitability, you can find which items or services are costing you more than they’re bringing in, either through pricing issues or inefficiencies in the supply chain.
For instance, if a product is frequently discounted or requires significant maintenance, it could be draining your profits. Analyzing profitability will help you find these loss-leaders and decide whether they should be dropped, re-priced, or changed to improve their margins.
In service-based industries, you might find that certain services require huge amounts of time or resources to execute, leading to low profitability despite high demand. Finding these “time sinks” early can help you restructure your offerings to end inefficiencies.
3. Adjusting Prices
One of the best reasons to evaluate profit on a regular basis is so you can adjust your pricing accordingly. It’s common for businesses to undervalue their offerings, especially when they’re starting out or when they’re in competitive markets. However, not pricing your services or products correctly can severely hurt your bottom line.
By evaluating which items or services are most profitable, you can identify pricing patterns that either help or hurt your profitability. For example, you may find that a slight price increase on a high-demand product has little impact on its sales volume but significantly boosts profits. On the other hand, you may realize that you’re pricing some of your services too high for your target market, causing customers to turn away.
Regular profitability checks allow you to stay agile with pricing. As market conditions fluctuate, demand shifts, or new competitors enter your industry, being able to adjust your prices in real time can keep your business competitive and profitable.
4. Improving Operations
Profitability analysis often shows areas where your operations may be inefficient. Whether it’s inventory management, staffing, or supply chain logistics, understanding how different services or products impact profitability helps you pinpoint inefficiencies.
For example, if a product service like sinks and installation requires frequent returns to the job site, this is definitely a red flag that points to issues in manufacturing, shipping, or customer service. These issues can sink profits (no pun intended), even if the product itself has high sales potential. Similarly, if a service requires excessive labor hours or specialized resources, the overall margin might be smaller than you realize.
By regularly reviewing the ROI of your services and products, you gain insights into where these inefficiencies are occurring. You can then implement improvements, whether that’s streamlining the production process, reducing waste, or investing in better technology to increase your overall operational efficiency.
5. Enhanced Cash Flow Management
Regularly checking the profitability of your offerings can also improve your cash flow management. Cash flow is the lifeblood of any business, and if certain products or services are tying up capital without generating profits, it can severely affect your bottom line.
For example, if you have a large inventory of slow-moving products, you might have money tied up in stock that isn’t yielding a return. Profitability analysis helps you spot these issues early so you can take corrective action, such as reducing inventory levels, introducing promotions, or stopping poor-performing items.
Good cash flow management is also essential for covering operational costs, paying employees, and investing in future growth. By focusing on profitable products and services, you ensure that your cash flow is steady, and your business can run smoothly even during lean periods.
6. Better Customer Insights
Finally, regularly checking the profitability of your products and services can offer valuable insights into customer preferences and behavior. If certain items or services consistently perform better than others, it may be because they align more closely with your customers’ needs, desires, or willingness to pay.
Understanding customer preferences allows you to make smarter decisions about inventory, marketing, and service offerings. Moreover, it enables you to tailor your business to meet the ever-changing demands of your target market.
Checking the profitability of the services and items you offer isn’t just a financial exercise — it’s a vital part of smart business management. By finding high-margin products, ending inefficiencies, adjusting pricing, and effectively use resources, you position your business for long-term success. Regular profitability analysis enables you to make informed decisions that enhance cash flow, reduce risks, and ultimately deliver more value to your customers. Whether you’re just starting out or looking to optimize your existing offerings, understanding profitability is one of the most powerful tools at your disposal.
Please send your thoughts and comments on this article to Sharon Koehler at Sharonk.SRG@gmail.com .