How to Identify the Most Profitable Products in an Uncertain Economy

From Uncertainty to Action: How BI Helps You Navigate an Uncertain Economy

Part III: Focusing on Recession-Proof (& the Most Profitable) Products

In the previous segment of our series of articles about how BI-based analytics help a business better cope with an uncertain economy we discussed the analytics organizations can leverage to improve accounts receivables – specifically, collections.

That article detailed how tools such as aggregated collections data, trend analyses, heat charts, and DSO (days sales outstanding) help an organization better manage their receivables.

Part III of this series focuses on recession-proof products – including key statistics and tools that help an organization more easily identify (and leverage) their most successful products.

It’s About More than Just Revenue Over Time

Successful selling is the result of so many factors –your products, clients, sales regions, and staff (to name just a few). For many organizations, trend analysis is at the heart of insightful selling. And yet most trend analyses today begin and end with a chronology of sales figures (e.g., monthly sales), totaled by one of the factors mentioned above (e.g., monthly sales totaled by client).

When the economy is uncertain, however, such a simplistic view of trend analysis isn’t sufficient. Knowing which clients’ sales are increasing (versus decreasing) is good, as is knowing which products are generating the greatest revenues. But — just because you’re selling the most of a specific item doesn’t automatically mean that it’s generating the most profits for your business.

The following analyses and metrics help you dig deeper into the true performance of your products and services – and help you distinguish those items that are truly recession-proof from others that may appear profitable on the surface but hide some unfortunate truths.

“Rank” Your Products’ Success

Simply put, recession-proof products are those that continue to be sold at a certain level regardless of economic conditions. Good times or bad, these are the products (and services) that your business relies on to pay the bills.

But – as simple as this sounds, analyzing your product sales isn’t about just a single number. You need to “rank” your products’ success, and that ranking is defined by four components:

Revenues
Gross profits
Cost of sales
And quantity sold

A truly recession-proof product is one that maintains similar levels in all four of these categories. Ignore any one of these and you could be basing decisions on incomplete data.

Focus on Profitability

Do you know which products are contributing the most to your organization’s bottom-line? How about those products that are detracting from your bottom-line? The KPI of “net gross profits accrued” (via Whale Curve & Pareto Graph dashboards) is one of the most important for a business, yet most organizations fail to view this statistic on a corporate level.

Cost of goods sold, cost of services sold, and overhead cost (the cost of keeping your business in business) are all factors that need to be considered when identifying those products that are your best defenses against a recession.

Track Inventory Turnover

Although organizations should always work to optimize their stock (i.e., strive towards a ‘just-in-time’ inventory where products do not languish in a warehouse), downturns in the economy raise stock optimization from a nice-to-have to an absolute necessity.

Tracking inventory turnover – a process referred to as a “financial efficiency calculator” – determines the speed of inventory sold. It enables an organization to calculate the optimum quantities of stock to keep on hand and – correspondingly, keep the cost of storing unused stock on-hand as low as possible.

Perform Multi-Factor Analysis

Identifying recession-proof products should go beyond looking only at product-specific metrics; you also want to analyze the customers to whom those products are being sold, and the salesreps who are having the most success in selling them.

Analyses that blend multiple factors – such as ‘top items to top customers’ – are key. A top customer who is not buying a top item represents a sales opportunity. So too does a salesperson who is not successfully selling a top item. Focus on the convergence of top-buying (and top-selling) behavior.

Don’t Ignore Poor Sellers

Although most every business is able to tell you which of their products sell best, far fewer organizations can readily tell you the reverse. Identifying these poor-selling items is a critical exercise.

High quantities of such items that are sitting idle in a warehouse need to be reduced and purchasing habits for these items need to be recalibrated. These slow-moving items represent locked-away capital that can be best used elsewhere.

Variance Analytics: Big Picture, Small Picture, Your Picture

The best way to identify recession-proof products is by reviewing the variances in their sales history over a predetermined time period.

But what time period comparisons should such analysis be based on? This year versus last? The current month versus the same month last year? Or how about the last two quarters?

The answer to the question of comparative time periods is simple: all of them. Year-over-year variances, same period variances, and rolling period variances together constitute the holy trinity of variance reporting. Use them all.

The Truth of Recession-Proof Products – via BI-based Analytics

When an economy becomes unpredictable, it’s imperative for an organization to have people, products, and processes that they can rely on to stay in business.

That reliance is based on the assumption that a sales staff is focusing on an organization’s best products – those that are provable winners when analyzed using an advanced reporting system.

Such a system goes beyond showing raw sales numbers to reveal critical truths about costs, profits, trends, and transactions. Although no product can ever be termed 100% “recession-proof”, BI-based analytics can push that percentage in an organization’s favor.

Want to see how DataSelf’s BI-based reports and dashboards accomplish the activities listed above? Check these quick 2-minute dashboard demos:

(Next installment: Leveraging Sales Staff Expertise)