The Importance of Understanding Profitability as Revenue Grows

I have seen several clients struggle with flat or compressing bottom lines despite strong revenue growth.

This happens because businesses are often focused on top line growth. Either growing existing accounts, adding new accounts or new products. They are not focused on profitability. Executives often have a gut feeling of which accounts or products are more or less profitable, but they do not have the data to support it.

Especially when a business is growing, understanding profitability across various pieces of the business is essential. The business needs to make sure they are investing time and resources in profitable sections of the business. If there are less profitable or even worse unprofitable pieces of business, it is imperative not to add any more drain but to come up with ways to jettison unprofitable business or take action to make it profitable.

A detailed study connecting all revenue and costs tied to products and accounts allows for a clear understanding of profitability by product line, customer or product line / customer combination. Once this data is available, it becomes clear where the business should focus its growth efforts and where improvement is required. Uncovering less profitable pieces of the business creates myriads of opportunity. Sometimes just letting go of a customer or a product can increase Net Income.

We recently completed this study with a client and identified key opportunities for the business:

• Focus business growth efforts on most profitable product lines

• Reduce or Eliminate sales of low / non profitable product lines

• Adjust client relationship structure for low / non profitable clients

A key first step in improving your businesses profitability is understanding how your profitability varies by product and customer.

If you would like to talk more about profitability e-mail me at stacy@pricingvelocity.com