How to maximize profit with
product profitability analysis
Product profitability refers to the financial performance of individual products or product lines. It measures how much profit a particular product generates relative to its cost. Understanding product profitability is essential for companies that want to optimize their product mix, pricing strategies, and resource allocation. You can calculate product profitability by subtracting the costs associated with producing and selling the product from the revenue generated by the product. CostPerform is the world’s leading cost and performance management solution and provides the insights you need to keep your business profitable in a highly competitive world.
What is product profitability analysis?
Product profitability analysis is a financial assessment that measures the profitability of individual products or product lines. Besides helping companies evaluate their products’ profitability, it helps you make informed pricing, marketing, and resource allocation decisions. The analysis considers the costs associated with producing and selling the product, such as direct costs (materials, labor, etc.) and indirect costs (overhead, marketing, etc.), and compares them to the revenue generated by the product.
For example, you’re a company that manufactures and sells five products. You notice that your company’s overall revenue is decreasing but can’t determine where this is coming from. You need to gather data on the revenue generated by each product, including sales volumes and price per unit. Using this data, you can calculate the gross and net profit margins. In this way, you can determine which products generate the most profit and which may be less profitable or even unprofitable. Gross profit margin is calculated by subtracting the cost of goods sold from the revenue generated by the product, while net profit margin considers all expenses associated with producing and selling the product.
In addition to calculating profit margins, companies may also conduct a break-even analysis to determine the minimum sales volume required to cover all costs associated with producing and selling the product. This analysis can help companies set realistic sales goals and adjust their pricing and marketing strategies accordingly.
Why you should choose CostPerform
for product profitability
Get more insight into the costs and revenue of your products.
CostPerform gives you the option to analyze strategies before implementing them.
You can innovate based on product profitability analysis.
The software is intuitive and easy to use.
How can you maximize your profit with product profitability analysis?
After the analysis described before, the company that manufactures and sells 5 products finds out that Products A and B have higher gross profit margins but lower sales volumes compared to Products C, D, and E.
If the company wants to maximize its profit with the product profitability analysis, it can use the insights gained from the analysis to make informed decisions on pricing, product mix, and resource allocation. In this case, they can focus on Products C, D, and E because they generate a higher overall profit despite having a lower gross profit margin. By prioritizing investments in more profitable products, the company can allocate resources more effectively and increase profitability.
There are other ways to adjust your pricing to maximize profitability or optimize resource allocation towards profitable products, such as marketing and R&D. Another possibility is to expand your product mix and use the insights gained from the analysis to develop new products that are similar to yourmost profitable products, or to identify opportunities for new product lines that can generate high profits. CostPerform’s solution allows you to calculate and analyze these strategies before implementing them. This way, you can use product profitability analysis to optimize your financial performance and maximize your profits.