We are all in business to make a profit. Our aim is to maximise our revenue and minimise our costs in order to produce the largest amount of profit. That way we have money to put back into our business, pay our stakeholders (including ourselves) or just save for a rainy day.
But often we get overwhelmed by our finances and simply hope that what we are doing will make a profit for us. By looking at our numbers we can obtain valuable information that can help us understand where to put our marketing focus. Finding the ultimate mix of products is one simple way that you can increase your profit.
1. What is this product’s variable contribution?
Selling a product has a cost. It may be the cost of the parts, packaging or labour. When you take this direct cost away from the price you sell the item for, you will get the variable contribution.
Stay with me! The variable contribution is the amount that a product contributes to overheads (eg rent, electricity, technology costs) and ultimately how it contributes to your profit.
Understanding the variable contribution a product makes to your business can help you make important decisions about what mix of products you should sell.
Action pants! In a spreadsheet, input the following information for each product. An example has been started for you.
Product 1 Product 2
| Price | $5.50 | $3.40 |
| Cost | $3.30 | $2.70 |
| Variable contribution | $2.20 | $0.70 |
2. Looking back
What was the sales figures for the past year for each of your products? How many units did you sell? A yearly view is great to start with as it helps to smooth out fluctuations over the months or seasons. Also think about what worked well and what didn’t go to plan.
Action pants! Grab your notebook and write down what your actual sales were over the past year
Product 1 Product 2
| Actual sales | 500 | 500 |
3. Looking forward
How many units of each product would you like to sell? Based on what you know about your sales fluctuations and taking into account the actual figures you just wrote down in your notebook, estimate what you think you might sell this year.
Action pants! In your spreadsheet add a line for estimated sales
Product 1 Product 2
| Price | $5.50 | $3.40 | |
| Cost | $3.30 | $2.70 | |
| Variable contribution | $2.20 | $0.70 | |
| Estimated sales | 1,000 | 1,000 | |
| Total variable contribution
(estimated sales x profit per item) |
$2,200 | $700 | $2,900 |
4. Play around
The fun part of this exercise is to watch the impact on your profit as you change the estimated sales for each product. You will soon see how many extra items you need to sell of your lower variable contribution products to reach the same total profit.
Action pants! Change the estimated sales figures to maximise your total profit
5. Shift your focus
If you’re looking to maximise your profit, and you now know exactly how much of each product you need to sell in order to reach it, then you are able to really hone in on what you need to do to achieve it. How can you focus your marketing efforts based on your targets?
Do you need to order more materials, create a promotion, produce new graphics or tweak your content plan? Perhaps you may need another person to help you or realise it’s time to update your website.
Whatever the action is, you now have the numbers to substantiate your goal.
Action pants! Write down three actions you need to take to reach your target.
Understanding how changes in product mix affects your profit allows you to determine the amount of effort you need to place into planning and marketing your product. This small piece of the puzzle is a big step to maximising your profit.
So have a stab at it! You’d be amazed at what you’ll find out. Share in comments or send me an email and share your learnings.
All the best,
Eliza