How to Calculate Your Most Profitable Products
Running an ecommerce business requires that you know how to juggle numerous operational tasks on a daily basis. That makes it so easy to caught up in the day-to-day grind that you lose sight of the big picture aspects of your business – like profitability. You likely know the amount of profit your business is making overall, but do you know which of your products make the most money?
What if you were able to identify your most profitable products? You would probably adjust some of your marketing approaches, maybe change your pricing, or perhaps add or eliminate specific products to your inventory. Learning what your most profitable products are will help you make those decisions and more, increasing the overall profitability of your business and your bottom line.
Why You Need to Know Your Most Profitable Products
If you run a company that produces, distributes, and/or sells various products, it’s crucial that you identify and understand the profitability of each of your individual products. Operating without this knowledge puts you at risk of making flawed business decisions. But with the knowledge, you are able to do the following:
- Make sound business decisions regarding your products and product lines that will improve your business’ overall profitability.
- Target marketing strategies to optimize your customers’ exposure to the products with the biggest profit margins.
- Allocate ad spending to increase the visibility of the products that are most profitable.
- Determine which of your product lines to consider for expansion.
- Decide when and how to adjust product pricing to further increase profitability. You may be able to increase the prices of profitable products still maintain customer demand and identify unprofitable items to discontinue or raise prices to increase the profit margins.
- Know which products will help you focus on your company’s growth and which products you have to consider eliminating.
- Use product bundling to pair less profitable or slower-moving items with more profitable ones to reduce the storage of less valuable products, making room for products with higher profitability.
- Determine which of your products to target for cross-selling and up-selling along with profitable products to increase sales revenue.
Most importantly, knowing what your most profitable products are and using that information to modify your marketing, inventory, and pricing, allows your business to thrive and your bottom line to grow.
How to Calculate Your Products’ Profitability
How to Calculate Your Products’ Profitability
To understand profitability, you must first be aware of the difference between profit and revenue. Much of the financial reporting you see from businesses relates to revenue, not what their actual profit is. Revenue is the total amount of money that your business takes in, while profit is revenue minus total costs. In other words, revenue is the money you make from selling products or services and profit is what is left after you pay your bills. The above description tells how you calculate your business’ overall profit; it works the same way for your specific products. The equation is simple:
Total Product Revenue – Total Cost to Sell Product = Profit
While the calculation appears simple enough, there are some factors that might be difficult to nail down. Revenue is easy – it’s how much the product sells for. It can get tricky when calculating the total cost you have paid to sell the product. You have to account for all direct and indirect costs related to the product.
Direct Costs
The price you paid for the product or for the materials used to manufacture the product.
Indirect Costs
Often referred to as overhead, which is the ongoing cost it takes to run your business. Examples of indirect costs include: marketing costs, internet and website costs, software, storage fees, etc. Because indirect costs are not usually specific to each product, you have to determine how much is allocated to each product. This is where calculations can get difficult. Depending on how detailed you are in your calculations, there can be a range in the amount you use for the indirect costs of a product. So, be sure that whatever you include stays consistent as you determine profit for different products, otherwise you are not comparing apples to apples.
Glew Reports Individual Product Profitability
To truly understand the profitability of your business, you have to be able to break it down to the individual product level. Each product that you sell has the potential to significantly increase or decrease your company’s bottom line. When you use Glew for your reporting and analytics, you have access to a comprehensive view of every product’s performance, profitability, and much more. You will find the valuable information you need at the click of a mouse, rather than attempting complicated manual calculations or paying an accountant to do it.
Let Glew help you make sound business decisions about your product line. You can try us for free for 7 days.
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