David Ogilvy the, advertising giant, famously said that I know that half my advertising works. I just don’t know which half!
We can also extend the same to the portion of a business that is providing profit that is unprofitable. Many companies are composed of literally 100s and sometimes 1000s of products (example a leading blue jean company that had over 10,000 product codes!). In many situations I’ve seen where the overall profitability of the company is being driven by a small portion of the universe of products it sells. In the case of the blue jean company about 40% of the products accounted for about 90 percent of products. The remaining products often contribute little to the bottom line and may in fact cost the company money.
Just the other week I went back to an old client and had the opportunity to examine the results from a portfolio optimization project. This company in the specialty food business had about 1200 different products many of which were unique to specific customers of geographies. After doing a fair bit of analysis, we recommended that they eliminate or consolidate about 30% of the products which accounted for only about 7% of revenue and were net drags on overall profitability- that is they cost more than they brought in.
At the time the head of sales- a very bright guy and a pretty terrific sales leader- had major issues with the concept of “walking away” from perfectly good revenue. We worked with him to fully understand what products were really necessary and which were not. We reached a compromise through which the company launched a project to reduce the number of products by just shy of 20%. This created a 5% revenue hole. It also allowed the company to increase focus on the most profitable products, immensely simplified things and gave the sales people a more focused “book” to sell from and promote. The upshot is that the CFO told me that over the last two years , the reduction of these “deadweight” products helped them to become more efficient and competitive in what we all know was the worst possible economic environment most of us can remember.
So what’s the secret of doing this?
1) Building a great fact base of the products contribution to company product
2) Really understanding the value and role of each specific product
3) Building great frameworks and screening filters
4) Working inclusively with important stakeholders to make sure that their input is accurately captured and incorporated
5) A willingness to try out new ideas and ways of thinking about value
Not so hard.