Manage Product Profitability

It is important to track and assess the profitability of products when managing products and services. A survey of participants in our product management and advertising classes revealed that most product managers did not have this information.

The majority of product managers stated that they did not have detailed information about the financial performance of their products. They are also not held accountable for profitability. They also indicated that there was a lack of economic data regarding the profitability of customers. Most of them also stated that they had no formal training in financial management.

What then?

  1. Find out if your product is succeeding in the market
  2. Discover where your product falls on the product lifecycle curve

The financial information needed to evaluate the financial performance of product lines is often lacking.

This article is for product managers or product marketing managers who need to align the financial performance of their products with the company’s goals.

Let’s first look at the use of financial information in managing products and services. Understanding financial tools and methods will help you plan and deliver the best financial performance possible for your products.

  • Business cases: how to build them Business cases are used as a way to justify investment in new products and product projects. They are the basis for financial planning. They allow for the testing of different scenarios using alternative assumptions (sensitivity analysis or what-if analyses) expressed in economic language.
  • Prioritizing investment in new projects or products. Each new product or project proposal (including line extensions and derivatives) has a profile of financial or acquisition because it draws on corporate resources. The proposal should, therefore, project a positive return to the firm. The economic measures can be used to rank the projects in order of projected financial return when alternate projects are being proposed.
  • Budgeting and planning. As part of the planning and budgeting process for the corporation, product groups are responsible for laying out the financial foundation for their respective “businesses.” Each product is a separate “business within a business” and, as such, should create a profile that includes unit forecasts, costs of goods sold, and profits. It is important to track actual performance as the financial period advances so that product managers can compare actual results with budgeted and planned implementation. The results are very revealing when variances are properly understood and analyzed.
  • Analyzing product performance. Product and marketing managers need to track the performance of your product as it moves through its lifecycle. You can track and graph the actual performance of your product against its plans if you’ve established metrics such as sales, market shares, cash flow, etc. Your product and marketing plan should include guidelines that will help you determine how to adjust your marketing mix. You can change your marketing mix more quickly if you are able to recognize signals in the market.

This was the context. Below are the tools and methods used.

Financial Statements

  • The Profit and Loss Statement (P&L) is also known as an income statement. It’s used to assess and plan business performance for a specific period, such as a calendar month, quarter, or fiscal year.
  • Cash flow is a measure of how money flows into and out of a firm. Cash flow is an important factor for product managers to consider when planning their product line. This will allow them to forecast when the cash from sales of products will start flowing into the firm.
  • A balance sheet shows the net worth or value of a firm as of a certain point in the past. A product manager may be interested in the balance sheet because the product might require production capacity to build or make the product. The value of buildings, machinery, and equipment is shown on the balance sheet as an asset for the company. According to accounting rules, equipment and facilities can be depreciated over time. This depreciation could appear as an “expense” on the P&L.

What are the most important methods to use in order to analyze the business performance of a product now that you have a good understanding of the financial statements?

Variance Analysis

You might have a number of questions if you review this financial report. Why, for example, were the sales higher than expected? A rise in marketing expenses? Why were marketing expenses higher than planned?

Financial Ratios

Financial ratios can be used to assess the financial strength of your product. These ratios are divided into broad categories. Here are two types:

  • Profitability Ratios show how the business is performing.
  • Growth Ratios Show how the company or products are growing their market share.

For more information on ratios, you can consult a book on financial management. You can also find industry ratios from a number of sources, such as brokerage companies, Dun & Bradstreet, and industry research organizations.

Ratios alone say little. Ratios can be used in conjunction with industry or business averages to provide a relative ranking of your business compared to others. Balances can also be used to illustrate relative trends of movement in your business over time.

The profitability of a product is a simple example. You will know that you are facing challenges if your profitability grows over several quarters and then starts to decline over time. If you notice that the economy is in a downturn and that companies within your industry are experiencing similar profit pressures, you may take different actions.

A final word on ratios. As you manage your product as it moves through its lifecycle, you will notice that the indicators upon which the performance of the product is based need to be fine-tuned. You’ll need to adjust the performance levers according to your marketing mix. Depending on your goals, you can adjust the marketing upwards or downwards. Financial statements, especially the P&L and ratios that are used to analyze the company will provide the product team with information about the outcome of the marketing mix adjustments.

It is not necessary to be an expert in finance to understand the financial aspects of your product or service. As a product manager or as a general manager of a business, each manager should be able to demonstrate some financial knowledge. It is important to have a basic understanding of numbers and data in order to optimize the performance of products and services for your firm.

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