In our last article, I explained how virtual Chief Financial Officers evaluate product mixes: By looking at actual numbers, particularly how much gross profit each product and service contributes to a company’s overall profitability. If you followed along, you have a list of what your product mix looks like now.
In this article, we’ll take the next steps. I’ll explain how Evolve CFO Services, a top provider of virtual CFO services for women business owners, helps clients adjust their product mix to maximize gross profit. (Note: “product mix” includes products and services.)
Are You Priced Right?
When providing virtual CFO services to women CEOs, the first thing we do when analyzing a product mix is review each item’s price. Is your pricing appropriate as compared to your competitors?
For example, if you charge $1 for an item but your biggest competitor charges $5 for the same time, there is room to increase your price. If you raised it to $5 or even $6, how would that change your profitability?
You may have some items that don’t appear to be very profitable. You may be tempted to scrap these items and focus on others that generate a bigger profit.
Hold up! At first glance, this approach makes sense. But you need to first verify that the low-profit item isn’t funneling customers to a higher-profit item. If that’s the case, you should analyze the two items as a combo. As we did in the last article, look at the combination’s total revenue, cost of goods sold (CGS), and gross profit. You may find that together, these items are, in fact, your biggest profit producer.
Your Place in the Marketplace
When providing virtual CFO services to women business owners, we also advise our clients to consider their place in the marketplace. What do you want to be known for? What do you use to distinguish yourself from the competition?
When adjusting pricing, make sure that your tweaks support the position you hold in the marketplace. For example, if you’re known for delivering stellar service, cutting your prices will not allow you to maintain high standards for long. Instead, increase your price – and find ways to deliver even greater value and levels of exceptional service.
Remember Your Mission
Above all, remember your mission. Why is your company in business? Adjust your pricing strategy and product mix to ensure that you can continue to fulfill your mission.
Let’s say that you manufacture socks, and your goal is to ensure that every child in the world has a pair of socks. You might think that lowering the price of all of your socks would make it easier for anyone to afford your socks.
Perhaps. What is more likely is that you won’t be generating enough of a profit (if any) to keep your doors open. Instead, you might discover that a better approach is to focus on increasing sales of your high-profit sock line, which would then make it possible to accept a lower profit margin on cheaper socks. You might even generate enough profit to launch a charitable arm of your business to give away free socks to needy children.
Don’t Forget Operating Expenses
One final important number to consider are your operating expenses. If operating expenses will stay the same in the year ahead, your gross profit and mission is enough to determine how you will tweak your product mix.
However, if your operating expenses will increase, also look at how you can reduce your CGS and increase your revenue. Your goal is to increase your gross profit
margin enough to cover the increase in your operating expenses.
Virtual CFOs Agree: Profit Is What Matters
When trying to grow their businesses, most CEOs look for ways to increase revenue. As a top virtual Chief Financial Officer services provider, we recommend finding ways to increase your gross profitability instead. It’s possible to increase revenue, but still lose money. It’s far better to ensure that you generate a profit. After all, you’re in business to make money, right?
If you’d like help analyzing your product mix and finding ways to increase profitability, book a complimentary Strategies & Solutions Session here to explore whether our virtual CFO services are right for you.