Poor Product in the Mix
Written by Andrew Goldman for Gaebler Ventures
Many small businesses have an unsuccessful product in their mix. Before launching a new product, set a point where the new product would be dropped from the line. By establishing this point before launching the product, you avoid keeping a losing product for too long.
One of the problems small businesses face is when they expand their product mix.
New product development may be part of your business strategy or related to the nature of your industry. In either case, when you're adding new products you need to be realistic about their potential success. Small businesses often hamper themselves with low-margin products in an effort to expand their product offerings. With any new product you are launching, be sure to set a pessimistic "drop" point along with your optimistic planning. The pessimistic "drop" point should be a low level of sales where maintaining the new product is no longer worth the effort.
By setting this "drop" point, you're removing the emotional attachment that often accompanies new products. I often see small businesses become attached to particular products because of the work that went into research and development. Remember though, in the business world you need to make practical decisions, and maintaining a failing product is not a practical decision. By setting the "drop" point, the emotion is removed from the decision.
When establishing the "drop" point, you should pick a level of sales well below the anticipated demand. The "drop" point may be consecutive periods of declining sales or it can be an annual or quarterly total. This decision should be made prior to launching the product, so excuses or other issues cannot come into play.
I consulted for a company in the herbal supplement business. Part of the CEO's strategy was to have a large variety of products while constantly introducing new products to the market.
When I began consulting for the company, they had eighteen different supplements on the market. When I analyzed the product mix, I found a few of the products sold less than 10 bottles per month! With a shelf life on the product of two years and a minimum production batch of 400 bottles, it was near impossible for these products to generate any profits. In addition, the cost of storing the extra raw materials and finished goods meant taking a serious loss on the product.
Part of the problem was that the CEO worked in research and development and many of the products were his "brain-children". As a result, he was hesitant to drop the products as he felt personally attached to this product. When I showed some raw numbers, however, it became obvious that keeping his losing products was not worth the effort. In addition, we set a "drop" point for the new products he was developing. This made the decision to keep a new product simple and easy.
Prior to developing and launching a product, you should have a general range for how successful you expect the new product to be. This range can be based on market research or intuition. In either case, you have expectations for the product, and these expectations should result in revenue and profit for your company.
By knowing the point where the product is no longer worth the effort, you'll save yourself valuable money and resources.
Andrew Goldman is an Isenberg School of Management MBA student at the University of Massachusetts Amherst. He has extensive experience working with small businesses on a consulting basis.
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