2.10 Product Revenue Analysis
Most businesses with inventory sell more than one product. These products vary in their prices, their costs of production, their turnover rate, and how much of each product is sold. Product Revenue Analysis is a tool developed specifically to evaluate these product variations and help a firm make strategic decisions in regards to their products. Such decisions might involve deciding which products to focus on, how or if to change prices, which product lines to consider or cut, etc.
Sample Product Revenue Analysis
Imagine there’s a startup that specializes in selling shovels, garden hoes and hatchets. The company is doing well but isn’t growing, and management isn’t sure how to extend their product line. They know what it costs to produce each of their products, they know how much each products sells for, and they know how much of each product is sold. On the other hand, the company doesn’t know how this information is helpful to making business decisions to developing company growth. As a random college student who the company has hired to work in the warehouse, you see the company’s lack of strategic thinking as an opportunity to show your true value as an employee by performing a product revenue analysis.
To start you compile a spreadsheet that shows each of the company’s products, the revenue brought in by each, the costs associated with the production of the products, and subsequently the income (sales-costs) of each. Your spreadsheet looks like the following.
| Products | Revenue | Cost | Income from Product |
|---|---|---|---|
| Shovels | $605,000.00 | $395,000.00 | $210,000.00 |
| Garden Hoes | $50,000.00 | $9,000.00 | $41,000.00 |
| Hatchets | $30,000.00 | $18,600.00 | $11,400.00 |
| Total: | $685,000.00 | $422,600.00 | $262,400.00 |
The next step you take is to determine the profit margin, percentage of sales, and percentage of income of each product. Profit margin is determined simply by dividing the income of each product by the revenue brought in by the product. Percentage of sales is calculated by dividing the revenue of each product by the total revenue of all product sales. Percentage of income is found by dividing the income from each product by the total income of all products. At this point, your spreadsheet looks like the following.
| Products | Revenue | Cost | Income from Product | Profit Margin | Percentage of Sales | Percentage of Income |
|---|---|---|---|---|---|---|
| Shovels | $605,000.00 | $395,000.00 | $210,000.00 | 34.7% | 88.3% | 80.0% |
| Garden Hoes | $50,000.00 | $9,000.00 | $41,000.00 | 82.0% | 7.3% | 15.6% |
| Hatchets | $30,000.00 | $18,600.00 | $11,400.00 | 38.0% | 4.4% | 4.3% |
| Total: | $685,000.00 | $422,600.00 | $262,400.00 |
This is when you astonish management by pointing out simple figures that they’re ashamed to have overlooked. First, you point to the profit margin and indicate how much larger the profit margin of garden hoes is compared to shovels and hatchets. You note that the profitability of a product is affected greatly by its profit margin. 82%, compared to 38% and 34.7%, is a pretty stark difference. Next you point to the relationship between percentage of sales and percentage of income. Having a higher percentage of sales than percentage of income indicates that the product isn’t as profitable as it should be compared to other products. Having a percentage of income higher than percentage of sales, on the other hand, indicates that a product has a higher profitability in relation to other products. Knowing this you are able to point out that the percentage of sales and income of shovels indicate that focusing on selling more shovels would not be as profitable as focusing on selling more garden hoes, which have an incredible difference in percentage of income and sales.
With a simple product revenue analysis you are able to impress the management of the company who subsequently promote you from a warehouse worker to head of business strategy. Congratulations!