Managing Product Profitability

Tracking and assessing the profitability of your products are important for managing products and services. Informal surveys of participants in our product management and marketing classes reveal, however, that a majority of product managers do not have access to that information.

Most product managers said they do not have detailed knowledge of the financial performance of their products, or are not even held accountable for product profitability. Furthermore, they indicated a lack of available financial information regarding customer profitability. And most indicated that they do not have any formal education in financial management.

How then, is it possible to

1. Figure out whether your product is achieving marketplace success
   
   
2. Find out where your product is situated along the product lifecycle curve

In many cases, financial representation on the cross-functional product team may be limited or absent, hence the information and insight needed to assess product line financial performance is less robust than needed.

This article is designed for the product manager or product marketing manager who needs to ensure that the product's planned and actual financial performance are aligned with the goals of the firm.

First, let's take a look at how financial information is used in managing products and services. By understanding the financial methods and tools, you will be able you to plan for, and deliver, optimal financial performance for your products:

• Building business cases. Business cases are used to justify investments in new products or product projects. They represent the baseline for product financial planning. They also enable the testing of outcomes using alternate assumption sets (sensitivity or what-if analysis) expressed in financial terms.
  
  
• Prioritizing investments in new products or projects. Each new product proposal or new product project (line extensions and derivatives included) has a financial or investment profile because each investment proposal draws on corporate resources and, therefore, should project a positive financial return for the firm. When alternate projects are proposed, the financial measures may be used to prioritize the list of projects based on projected financial returns.
  
  
• Budgeting and planning. During the corporate budgeting and planning process, product groups should be laying the financial groundwork for their “businesses.” Each product should be considered a “business in a business” and should, therefore, be creating a profile for unit forecasts, cost of goods sold, expenses and profit. As the financial period progresses, it is imperative to be able to assess actual performance so that the product manager can compare the actual results to the budgeted or planned performance. When variances are understood and analyzed, the outcomes are revealing.
  
  
• Analyzing product performance. As your product moves through the various phases of the lifecycle, product and marketing managers should be tracking the performance of the product against planned targets. If you have established metrics like sales, market share, cash flow, etc., you're able to track (and graph) the actual performance against your product plans. The way you adjust the marketing mix is dependent on the guidelines you should have established in your product and marketing plans. The faster you recognize the signals from the market, the faster you can respond and adjust the levers of the marketing mix.

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Steven Haines is the founder and president of Sequent Learning Networks (www.sequentlearning.com), a firm providing product management and marketing training and consulting. Reach him at sjhaines@sequentlearning.com.