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Demand for products waxes and wanes, typically with business cycles, product life cycles or as competitors move into your space. In some cases, products that were once profitable start to lose money, in others, newer products replace older products. Even in the heat of day-to-day work pressure, product line leaders should keep their eyes open to the strategic and financial contribution of products & services to the company.
If you’re doing your homework, there should be no surprises. Paying attention to the product mix within a product line or portfolio is vital to your company’s success. Regularly review results and create portraits of your product lines to help you understand how the products have performed and how they’ve evolved. Plot your products’ performance on life cycle curves as they evolve over time and monitor conditions and triggers. This provides you with vivid images of what’s now possible. What should savvy product managers be considering?
DECREASING DEMAND OR PROFITABILITY
If demand has waned, or you’re losing money, you need to think about whether the product can, at any time in the near future, become a contributor. Like sinking investments in any securities portfolio, you may wish to jettison those products sooner, rather than later in the same manner that you would sell stocks. Some product line managers want to hold on because customers may be considered strategic. Well, what good is a strategic customer if it’s not profitable?
TOTAL COST OF MAINTAINING THE PRODUCT OR SERVICE
Here’s another factor to consider. Are there any products in the portfolio that are costly or complex to produce, maintain, or support? Think about costs to produce or expenses to support.
If you produce tangible products, perhaps it’s time to take a closer look at your cost of goods to determine the level of variability against cost standards or targets. Even if cost variances are examined regularly, those who do the analysis may not have your product line’s best interest at heart. Products that cost too much to produce may need to be rationalized, outsourced, reengineered, or discontinued. Again, contribution to the business is an over-arching concern. You can also look at platform rationalization or updates that might expose potential economies of scale. Other product areas may benefit as well.
If you deliver services, look for synergies across the product lines. IT, Web development, professional services, advertising, and other areas can offer you interesting opportunities. Did you ever notice multiple brands from one company in the same television commercial? This can be a particular challenge if these expenses are allocated by algorithm from the operating departments. However, there are still opportunities to manage expenses.
PRODUCT LIFE CYCLE CONSIDERATIONS
Where is your product in its life cycle and what is your strategic intent? Some companies wait until the product or service is in serious and indisputable decline – sales and profits are decreasing at an increasing rate. As we mentioned above, most often companies won’t discontinue the product because of 1 or 2 strategic customers. What will it take to migrate those customers to a new product line? How about increasing the price of the product or service to the point where it makes better business sense for that customer to switch to a different one?
During the growth phase of the life cycle, savvy product managers often add features and versions to maximize market share. But what happens when that product matures? Typically, margins (or profits) come under pressure due to commoditization or a saturated market space. Now is the time to look at each and every version and make a determination of the impact of pruning the product line back to increase economies of scale and streamline the portfolio to reduce ongoing operational costs.
Some companies will even choose to rationalize the product line during mid to late growth phases. Why? So that competition is always catching up, always on the defensive and market leadership continues for the incumbent.
WHAT’S THE BENEFIT OF PRODUCT LINE
RATIONALIZATION?
Product line rationalization ultimately is about optimizing the scarce resources that we have. The monies you put back into the business in terms of saved operational, development, marketing, and sales focus pave the way for investment in new product and services. This ensures that new innovations can be funded and drive the organization to continually consider potential innovations. Product line rationalization doesn’t mean just cost reduce or turn off. It means invest wisely. In tough times, some companies cut back on strategic innovations, technology investments, and the like. This is a mistake. Ongoing market and customer research characterized by market visits, learning journeys, and other techniques should be carried out continuously to ensure that there are viable innovations in the pipeline.
Suggested Reading:
Pui-Wing Tam, “Your Home Printer Just Got Obsolete,” Wall Street Journal June 25, 2002
“The Customer Profitability Conundrum, “ Strategy + Business April 2003
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