Problem of investment
As a company, you may have a range of products or services - some of which will be doing better than others - but all of them will need investment in some way. Product or service investment can often be a difficult decision, as some products may be well established and have proved to provide reliable income generators over a period of time, whilst others may be new and need a great deal of investment before you can decide if they will ever be successful. So, the question is, how do you choose which products to prioritise when it comes to investment?
How to decide which horse to back?
There have been a number of analytic tools, which have been designed to illustrate which aspects of your product range, need more investment and which products need reduced investment. Whichever method you use, the process is known as ‘product portfolio analysis’.
Understanding Product Portfolio Analysis
A product portfolio analysis is normally conducted by the marketing team and will require various bits of information including sales and customer information, production costs, distribution costs and customer service data. The aim is to gain a clear picture of how the product is performing. This is a wider measure than just the number of sales, it could include repeat ordering profiles or customer return or complaints numbers. Once the information has been collated and analysed, an in-depth understanding of the product’s relative importance can be obtained.
How important is a product?
Based on your analysis, you will be able to identify which product produces the most sales and also, which product may provide the most profit – remember this may not necessarily be the same thing! You should also be able to understand which products are the most problematic or difficult. This could be due to complex manufacturing processes or intensity of high skilled labour, or perhaps because the production of this product is new to your company. A wide range of factors may influence the complexity of the product and it is important to understand these issues because some may well be remedied with time whilst others may be irresolvable issues that need to be carefully considered. Once your product portfolio analysis is completed, you will be in a position to understand the holistic position of the company’s relative product range. This needs to then be considered against the wider context of the products’ maturity, or what is sometimes called the product life cycle.
Product Life Cycle (PLC)
The product life cycle is very similar to a human life cycle in that a new product will start slowly, achieve few sales and need a great deal of investment. As the product matures the level of sales grows and the required level of investment (research and development, sales and marketing etc) will reduce. This stage is often the most profitable stage of the product cycle. Eventually, as the product becomes dated or the number of competitors becomes saturated, the product will begin to decline and will eventually become untenable as a commercial product.
Importance of understanding the Product Life Cycle
By understanding your portfolio of products relative to their own product lifecycles, it is easier to make investment decisions based on the individual product’s future probability of success. Often, companies make the mistake of investing in products or services which were once very profitable but have now began to decline. The level of investment becomes disproportionate to the return and can starve new products of vital investment.
Making the decisions
It can be more difficult to make investment decisions than you may think. Often, the best and most influential individuals within the business have been in charge or responsible for the top performing products. The identification of a popular product reaching its maturity and beginning a decline may well be contested and undoubtedly, the decision to begin withdrawing investment and directing it into new products will be a controversial decision. It is for these reasons that product portfolio analysis and product life cycles need to be understood across the business so everyone has a clear understanding of what product provides what function/profit to the business.