Many businesses are undermined by products that underperform and that should be removed from the market. Often, these products continue to be released for sentimental reasons or because the company believes that the product will eventually become successful. Fortunately, with the help of good accounting, you can determine when it is time to discontinue a product.
Assessing the Product's Cost
One of the challenges of determining whether a product is profitable is to determine how much it costs. There are obvious ways to measure a product's cost, such as how much you must pay to purchase or manufacture it. However, there are several other ways in which a product can cost you money.
One issue is the cost of customer service. When you offer a product, you must continue to provide support, and you must train employees on how to provide adequate customer service for that particular product. If for whatever reason, a product costs more than others in customer service calls, you may want to discontinue it.
Products that take a long time to sell will cost money in storage costs. If you have a lot of product sitting in a warehouse, you may want to stop manufacturing it and find an effective way to unload the discontinued product, often at a discount.
Don't Forget About Opportunity Costs
Another consideration is the opportunity costs. By having a product sitting on your shelf, there is another product you're not able to offer. For the money you spent on the product, there may be a more lucrative product you could be spending company resources on that will bring a better return on investment.
Rely on Your Accounting Department
Fortunately, with a reliable accounting department, you will have access to all the information required to know when it is time to discontinue a product. You should set specific requirements for a product to be kept on shelves and you should not let sentimentality get in the way of your bottom line.
Set Specific Goals for Each Product
Determine your desired rate of return. Set goals for the profit margin and the return on investment. When your product isn't reaching these goals, first consider if you can make changes that will make a difference. You may be producing too much of the product, or you may not be producing it efficiently enough. With the right financial information, the decision will be much easier.
For more information, contact your local business accounting service.Share