With the recent financial situation businesses are currently caught between cost pressures and trying to maximise margins and profitability. Inflation has driven up staff costs with many technology companies including Meta, Twitter and Shopify having laid off thousands of staff to significantly reduce costs.
Today, careful resource allocation and profitability analysis are necessary to maintain financial health. In tech, businesses should be evaluating their full digital product portfolios to understand which items contribute most to the bottom line and use those insights to determine which to double down on, which require adjustments and which to phase out.
This is the time when business execs need to be focussing on their products and platforms that deliver the highest margins and high sales. Across-the-board adjustments like spreading investment equally is likely to be a mistake.
Analysing your product portfolio will position you for success in a time of resource constraints by ensuring time and money are spent in the right places.
The steps outlined below will aim to help you understand which of your digital products in your portfolio to prioritise to maximize profitability and mitigate the effects of higher costs.
1. Using the Pareto Principle
It’s important to understand which of your products drive revenue and more importantly, profits. For most businesses, 80% of profits come from 20% of their product offerings. Using the Pareto Principle to categorise your products is a great way of prioritising which should receive less investment.
Aim to identify which of your products are top-selling and high margin to understand what makes up that 20% but also keep in mind there is some nuance. Some may be complementary products that are not in the top 20% but drive sales of other related highly profitable products.
Products that you identify that appear toward the bottom of your list are the ones that are prime for removal barring compelling reasons such as the one given below.
Case study example
One of our clients, SANS, which is the largest and most respected provider of cybersecurity training in the world, provides a huge range of training courses. Some of those courses may be less profitable for the business but they get their customers into their entry training courses and onto the roadmap of other training that is more profitable for the business. In addition, customers are encouraged to purchase add-ons such as exam certification. This can be even more profitable for the business.
We have worked with the team at SANS to identify what user experience changes could be made and tested to increase the add rate of their certification bundles when a customer purchases a training course.
These relatively simple user experience changes can be trialled with A/B testing and have the potential to increase margins, revenue, and profits for the business through a relatively small level of investment.
2. Investing in the top 20%
Once you have identified your top 20% then you may need to look at prioritising investment in these areas.
Some of your products in this category may show a year-on-year decline but still be more profitable. In this instance, you may want to look at how you improve that product to reverse that trend and maintain profitability. This is known as a product extension.
Speak to your customers and identify what they like about the products so much and what they would like to see. These should be built into your product development lifecycle and have them prioritised as features and enhancements by your team.
Continuing to invest in this area is likely to mean that you can maintain your pricing and possibly even charge a premium.
3. Understanding the role of labour
Whilst we note the major tech companies making redundancies earlier on in this article, it’s important to remember that at the time of writing, the number of US job openings is still at a high of 10.7 million with the UK also seeing highs of 1.2 million. Many of these companies are making redundancies as they aim to prioritise certain parts of their business and investments. The labour shortage is especially acute in roles that require specific skills or experience.
If you don’t have the necessary labour to maintain and operate and improve your digital products and platforms, that can limit sales.
There are options here. The use of third-party resources can also help. Often seen as a more expensive solution, it can save businesses money in the long run. It saves having to employ a complete team on a permanent basis. Projects can be carved out and you can work with that supplier for a period of time whilst the product is delivered, and you reduce the risk of long-term staff commitments.
Technology can also be used to automate business processes. This can reduce the reliance on labour and free up your workforce to spend time in other more important areas where you may have gaps.
Case study example
One of our clients was using existing content management tools that were disrupting and inhibiting their vision to efficiently deliver the best possible content and thereby causing frustration in their team. The delivery and product of the content involved multiple people, using multiple tools which were highly inefficient and open to the risks of human error.
We were able to produce a new, singular tool that would streamline their processes, reduce the chances of error, and increase efficiency in the delivery of new content. This freed up resources and enabled them to concentrate on other more important areas of the business that would deliver higher revenue and profits. See the complete case study here.
With businesses staring down a recession, evaluating your entire digital product portfolio and making informed choices about which ones to phase out or increase is one way to prepare. This can mitigate the impact of higher costs and protect profitability.
Businesses must be laser-focused on profitability and accurate analysis will allow you to allot resources and investments in the right places. An even-handed approach will not allow you to do that. This approach will not only help you weather the storm but increase the likelihood of better-than-average growth out of the back of the downturn.