Sometimes, product profitability just isn’t enough

A core issue within retail is to find the perfect product mix, appealing to the perfect variety of customers. Managers are faced with the decision of which brands and which products to sell, a task made harder by the fact that the selling price is imposed by tough competition and – often – extensive supplier guidelines. In order to get the best possible gross margin, getting a good purchasing prices is of essence. But is this enough to guaranty a profitable business? We say not.

There is another, often overlooked aspect of large-scale retailing: The more complex the product range and the customer base is, the larger the indirect costs become. Costs that are often hard to allocate to customers and products, such as costs related to IT systems for warehouse management, product tracking, or online purchasing. This leaves management with a fairly static gross margin, plus costs that are hard to analyse, which in its turn makes it very difficult to identify the combinations of products and customers that are profitable, and to separate them from the ones that are not.

But why is the combination of products and customers so important? Isn’t it enough to just monitor product profitability, and to focus on the most profitable products?

It is true that advanced cost calculation models help you simulate the expected profitability of upcoming products, making the decision of which products to sell easier. In fact, Astrada has the experience and the tools to help you build such models, spanning across your entire business process, from purchasing through product maintenance and logistics to sales and marketing.

However, this is only one side of the coin. By selecting only profitable products, your business may very well be left with a fragmented and crippled product assortment, forcing your customers to turn to a competitor that offers a more complete range of products. That is, unless some kind of profitability analysis model is developed and deployed, taking into account both product and customer profitability.

Astrada helps retail organisations monitor product- and customer profitability at a continuous basis. By implementing Astrada5, we supply you with a tool that puts accurate and relevant profitability information at the hands of your organisation. This also improves the quality of your decisions, as it allows you to actually simulate and monitor the bottom line effects of changes in your mix of products and customers.