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Have you ever wondered why you may be selling more and more but aren’t making any more money? You may have a problem with your mix.
Just as too much of one ingredient can ruin a recipe, mix can make the difference between profitability and losses, a cash crunch and money in your pocket. It requires a bit of number crunching, but it is well worth evaluating your costs to this level of detail.
Mix is a factor of what you sell, who you sell it to and ultimately how you get into your customer’s hands. Finding the right balance can lead to greater profitability.
Here’s a breakdown of the three.
Customer Mix Imagine you are a manufacturer of widgets. You may sell the same widget to many customers. Some customers are high-maintenance and require expedited shipping, others order small quantities sporadically leading to a distribution head-ache. Others have integrated their demand planning with your company so you can manufacture to their demand.
Each of these customers cost-to-serve is different and the pros and cons of all their special circumstances should be weighed with what they contribute to your bottom line.
Product Mix As a widget maker you sell Basic widgets for $1 and Deluxe widgets for $2. Deluxe Widgets cost more to make relative to their selling price, i.e. they have a lower profit margin.
While you may be enticed to try to sell more Deluxe widgets because they can bring in higher sales, look what happens to your bottom line if you sell the same amount in dollars of both types:
Imagine what would happen to your profitability if you decided to sell more Deluxe without understanding this? You’d be scratching your head wondering– “I’m selling more but I why don’t I see it on my bottom line?”
Channel Mix. What you sell is important, but how it gets to the customer can make a difference too. Think of the many ways a widget can be sold. It may be sold directly via an online store, through a distributor, or directly to a retailer. In each scenario, the same exact widget is winding up in the hands of the consumer but how much profit ends up in your pocket may be very different.
What can you do once you understand your mix? You can actually increase your profitability by strategically choosing which channels to sell in, what you sell and whom you sell it to.
You can make better pricing decisions when you come across a high-maintenance customer and you can identify if there are ways to reduce costs of your lower margin products.
You may even find you have to eliminate a product line, fire a customer or stop selling through a channel.
In other words, you may need to adjust the “recipe” of your mix to yield the best returns.