Business Performance
Not sure which products or customers make money
“We do not know which products or customers make money.”What owners tell us
The situation
Signs you are facing this
- Overall margin is fine, but nobody can say where it comes from
- Prices are set by habit or by matching competitors
- Big customers take the most time and discounts
- Some product lines are kept going for years without review
The situation
Not sure which products or customers make money
Driver 1
Overheads spread evenly
Shared costs are split by sales, hiding the lines that use more resources.
Driver 2
Discounts and returns not tracked by customer
Gross sales look good while net earnings fall.
Driver 3
Accounts built for tax, not decisions
The chart of accounts cannot answer management questions.
- 1
Diagnose
Set up cost drivers
Allocate shared costs by what actually drives them.
- 2
Design
Build a profitability matrix
Margin by product, customer and channel in one view.
- 3
Embed
Decide
Reprice, renegotiate, promote or drop, with numbers behind each call.
- Margin by product and by customer
- Cost allocation model
- Pricing and mix recommendations
- A repeatable profitability report
Common questions
How do I calculate profit by product?
Start with sales less direct costs, then allocate shared costs such as delivery, storage and staff time using the activity each product actually consumes.
Can this be done from my existing accounting software?
Usually yes. Most of the data already exists; it needs tagging by product or customer and a simple model on top.
Related situations
- “We price imports off the invoice, and margins keep surprising us.”Import costs and margins you cannot see
- “Revenue is up, but running the business feels harder than ever.”Revenue is up, but the business feels harder to run
- “We are about to scale, and I am not sure the model holds.”About to scale, unsure the business model holds