Understanding Your Business Better
Business data is a key asset for a company, as we discussed in the previous data article, but how many businesses structure and analyse this asset to their advantage? Contrary to the sentiment behind ‘analysis paralysis’, we will show that relatively simple analyses of your data should bring a focus for action in a business, resulting in many Customers purchasing more and often giving a business an improved profitability. The second blog looks at product/service portfolio management and builds on the first blog for Customer data.
Defining Your Product
Very few businesses have a single product or service. For those with multiple product lines, products can be grouped by technology or function – for example, a battery has a different function and application compared to a switch. Within a category – let’s take ‘batteries’, products can be split into further families – alkaline, lithium and lead acid as examples. This process of sub-categorisation can be continued, as required, to create groups of product lines that have meaning in a market. Taking ‘lead acid’ batteries, these can be grouped into those for emergency lighting or uninterrupted power supply (UPS) applications, amongst others. The power of these groupings is that they allow comparison against market performance; more on this later but, to stress again, the focus of the analyses and comparisons is to drive action as appropriate.
A graph can be produced showing the sales of each product line in diminishing order. Certainly, for businesses with a large number of products, this graph usually has a long tail of relatively low sales product lines; pareto often applies, with 20% of the lines representing 80% of the sales. Inspection of this graph can lead to some additional questions before actions:
Product Portfolio Management
For top sales items:
- Are the sales driven by high volume to a single (or few) Customers? If so, this represents a risk, but also an opportunity. The risk can be mitigated by ensuring that the product continually meets any changing needs of the Customers. The opportunity is in selling the product to more Customers who ‘look like’ the current buyer (providing this won’t compromise the existing relationships); see the blog on Customer analysis to see how segmentation can help this process. ‘Look alike’ audiences are also discussed in our Internet Marketing Series of Blogs.
- Are sales of the individual product growing or in decline? In either case, it would be good to understand why and plan accordingly.
For low sales items:
- Are the low sales due to a previously popular product now in steep decline, possibly at the end of its life cycle? It may now be time to discontinue this product, communicating this to all remaining Customers and offering an alternative. If no alternative is available and there is a persistent demand, then pricing must reflect this being retained as a manufactured/stocked product for only a few Customers. Effectively once the consumption has dropped off and people are not purchasing so frequently the business had to make the decision on either increasing the price of the product and becoming one of very few suppliers, or 2. Dropping the product from the portfolio.
- Is the item a member of a product group important for overall range credibility? For example, a particular colour option? If so, discontinuing the single item may have knock-on effects to the sales of all product group members.
- Is this driven by a very low item price (but still at reasonable volumes), for example an accessory? As above, discontinuing supply of an accessory could significantly impact the family sales and is not recommended. It is a good idea to make sure accessories are associated directly with dependent products in the grouping activity above.
For items in the middle of the graph, it is important to know in which direction they are moving in time. Are they growing or declining in sales? What actions need to be taken at this point in time? If none, when should a next review be held?
Product life-cycle management
Products will have a life cycle, defined by introduction, growth, maturity and then decline. The product life cycle graph plots the sales profile of the product (or product family) over time. These products can be individually overlaid against the graph and/or grouped as a close associated product family. ‘Kotler’ introduced a detailed perspective of the differing tactics to be employed at each stage. The four group product life cycle can seem simplistic in many businesses. But having been here with many businesses, it is a great way to evaluate your product portfolios.
Market research can indicate the potential popularity of a product, but the real test is when it is launched for purchase. Follow upmarket testing, as well as frequent sales monitoring, is critical to establish if the product exactly meets Customer needs and the price position is correct. Targeted marketing, focusing on the key differentials of a product against its competition, can stimulate the required feedback. Some modification of features may be required to fully meet the market feedback but, clearly, if a complete re-design is required this is best treated as a new product with a fresh introduction plan. If the feedback is positive and matched by a growing sales profile, then the marketing must be extended to fully exploit the products potential.
This is the time to push to optimise the market share potential of the product. Marketing and sales activity should receive significant investment to reach the maximum number of Customers for whom the product satisfies a need. It is an exciting time as, if done correctly, the sales profile shows a steep positive ramp. It is important to recognise that competitors will also see your new product and react to it; if a key feature can be patented, then this may extend the time you have to exploit the maximum sales opportunity. Whatever, this is a time to be bold and establish the new product as a market leader or, at the very least, achieving a significant market share.
A period where the sales growth starts to slow and eventually levels. Whilst there are still potential new Customers for the product, the balance of investment will swing toward ensuring repeat Customer satisfaction. The product will be ‘designed in’ across a broad base, so it is vital not to give these Customers a ‘moment of truth’ and allow them to look for alternative suppliers. Make sure production schedules (and/or stock holding) are planned to meet all Customer requirements; production efficiencies due to volume may allow for price reductions if demanded by a Customer. Small modifications, or enhancements, could be required to keep pace with changing Customer needs. It is also important to recognise that the initial buyer may have changed job, moved to a different company or retired; so, overall Customer relationship management will be important.
Products reach a point in time where sales drop. Markets can change; for example, the impact on tungsten filament lamps due to concerns about wasted energy usage. Competition can become more fierce; persistent and aggressive competitive activity could diminish your share, or competition may have developed a ‘next generation’ product. Here, the clue should come from feedback in the ‘mature’ stage; Customers are telling you about changes they require and YOU should be the first to develop this next iteration. There is always likely to be a core of Customers who want to continue supply of the product; but reduced volumes mean the unit cost of production increases and this needs to be reflected in your price to the Customer. At some point the product becomes uneconomic to produce or stock and/or too high priced to be attractive; at this point, an alternative should be available and offered in order for the original product to be discontinued
Performance against the market
The relevance of this view can be illustrated by an example. A business has a diverse product portfolio which contains batteries and switches amongst others. Batteries are showing year on year growth of 6%, whilst switches are at 1% growth. This internal analysis may give an opinion on the relative management performance of the two product categories. However, research is available which gives a like-for-like market perspective; this shows that the batteries market is growing at 14%, whilst switches have been in slight decline. The perspective should now change – batteries are losing market share, whilst switches are making small gains against the market. It is vital to understand the competitive environment before making tactical decisions or, indeed, taking none at all. Who are the successful battery competitors and what are they doing that you are not? What actions are driving your small market share growth in switches and can these be replicated in other area’s? This ‘view of the external’ is encapsulated in an approach taken by the Boston Consulting Group, called the BCG Matrix.
This organises products, or product families, into a 2×2 matrix with the vertical axis showing market growth and the horizontal axis market share; the delineators are ‘high’ and ‘low’, on both axes, as shown.
These are products that operate in a low growth market but give you a large market share. As the name suggests, these are the products that will generate you cash; there is little competitive activity and you may even operate in a near-monopoly. The strategy should be to retain customers and maintain the product; in essence, this is not a high investment ‘box’, but sufficient to keep your high market share.
Here, you again have a high market share, but this time in a high growth market. Operating in a highly competitive environment, you have to work hard to maintain share; it will be important to invest in regular marketing and sales activity to ‘remind’ Customers (and potential Customers) of the benefits of your product and continue to leave them confident in their buying decision. Ongoing development of the product may be required to keep your offer ahead of very active competition.
Sometimes also called ‘Question Marks’, you have a low market share in a high growth market. The market growth is attractive, but you are up against established and successful competitors; this can often be the case with a new product introduction into an adjacent market. In such a case, it is important to understand the market structure. If the market is dominated by a small number of very high share companies, then you must have developed a well-researched differential in your product, that you can ‘shout about’, and that will relatively quickly steal their share; alternatively, if the market has a long tail of low share competitors (like yourself) then you may decide to target the tail and consolidate share in that way. In all situations, Problem Children need careful frequent monitoring for success against investment.
In this final ‘box’, you have a low share in a low growth market. Clearly, these products do not lend themselves to high investment and may even be loss-making to you. Even so, there are a couple of questions to answer. Is the product ‘connected to’ either a star or a cash cow and seen as important for the range credibility of these higher-value products? Are simple, low-cost, changes to the product capable of making it attractive to a high growth market? Is re-branding the product going to give it fresh appeal? In many cases, the answer to these questions will be ‘no’; in these cases, it is advisable to ultimately discontinue the product, making sure you have communicated this decision to Customers and, where possible, offered an alternative.
It is important to have a dynamic perspective of this analysis in time. Ideally, a business should plan to move a problem child to a star and then to a cash cow and make investments accordingly.
Frequency Of Product Analysis
Every business with one product manager/owner, versus multiple products, multiple product teams, multiple product managers. Every team will be different in the frequency of analysis. The ‘core’ or strategic set of products important for the company’s identity and brand influence will need to be analysed regularly. Many businesses will set dashboards up with tools connecting to Xero and Sage, Finance tools for SME businesses. These will link into product management tools for smaller businesses, such as those from Futrli for example, once set up providing dashboards to monitor the most strategic of product lines. At the larger end, sophisticated SAP implementations will monitor 100’s of thousands of product lines.
So there’s no rule on the frequency of measurement, other than to say that the Pareto rule applied earlier will be an indicator of your real revenue and profit sources. This will determine the frequency of measurement and the turn of stock, product revenue streams.
The importance of Product Management
Hopefully, the foregoing should illustrate the importance of Product Management as a function within a business. Not only is it vital for the Product Manager to have technical knowledge of their product and to input into technical development, they must also have extensive market knowledge and understand the competitive, legislative and environmental environments in which their product(s) operate.
Product Management should act as a hub for multiple communications and decision making within a business. Marketing, sales, purchasing, stock control, production, technical and customer services are often key contact points for a Product Manager.