As you rationalize your product portfolio to save your organization money, you will run up against a tough decision: which products are on the verge of breakout growth, or already produce solid growth? Do you have any tired and grey products, withering away on your price lists?

As you know, gut feel isn’t enough to justify a decision that impacts every facet of your organization. Every function of your organization, from sales to support, marketing to manufacturing, will second-guess your decision to cull one of their “sells itself” products, or to hang onto a maintenance nightmare.

 

Fortunately, a product-level analysis provides the objective, numbers-based decision guide you’ll need to support your decisions. The analysis uncovers the impact each product has on your business and delineates the stars from the laggards.

 

A note about the data referenced below: if you don’t currently have it, start collecting it now. You can likely use some type of existing data as a proxy though directly-measured data is highly preferred.

 

Download our CTS CLTV Calculator to understand your true cost to service each of your products, estimate past, present, and future net revenue for a particular product, and classify each product in your portfolio.

 

Step 1: Understand Ongoing Product Costs

 

The first step on your product decision journey is to understand your true cost to service each product, or Cost to Serve (CTS). CTS is a management tool designed to generate insights into costs and profitability and is derived from activity-based costing techniques. It furnishes you an accurate picture of profitability at a product or product category level for each customer.

 

 

When performing an CTS analysis, consider all costs associated with each product. If you miss a cost line item at this step, you could incorrectly elevate the value of an overly-complicated, support nightmare.

 

As mentioned earlier, you should track and use directly-measured data whenever possible. However, you may currently aggregate some of your costs, such as Sales Visits, across products or product lines. Your sales ops leader might be able to bail you out with a detailed cost breakdown based on call-level data. More likely, you’ll move forward with estimated cost splits based on product complexity, sales cycle length, and other metrics in your analytics toolbox.

 

 

Step 2: Understand Product Value

 

Your next step is on the value side of the ledger, Customer Lifetime Value (CLTV or LTV). As its name suggests, CLTV quantifies the lifetime value of a customer for each product. It calculates the net revenue you can expect from a customer for a given product.

 

 

Taking it a step further, CLTV enables you to estimate past, present, and future net revenue for a particular product. Customers that purchase additional product lines, new customers for each product line, and retention rates are key inputs. Most importantly, you should not consider CLTV a one-time calculation. Rather, treat CLTV as a metric, an ongoing calculation that will vary over time.

 

 

 

Step 3: Use Your New Metrics

 

After you calculate cost (CTS) and value (CLTV), you can finally classify each product in your portfolio. A simple two-by-two grid creates a decision matrix and allows you to segregate each product into one of four quadrants:

 

  1. Products with high CLTV and low CTS should be Optimized and Maintained

     

  2. Products with high CLTV and high CTS should be closely studied to understand how you can Minimize CTS

     

  3. Products with low CLTV and low CTS should be Held or Investment should be Reduced, depending on where it falls in its product lifecycle

     

  4. Products with low CLTV and high CTS should be Sunset as they are not profitable for your organization

     

 

Step 4: Now What?

 

Say the analysis you just walked through confirmed your initial hunch: a handful of “Sunsetters” are dragging down your profitability. Now what do you do?

 

Use the following best-practices to smooth out the sunsetting process and reduce the risk of alienating internal stakeholders and valuable customers alike.

 

  1. Involve all departments in the decision to sunset

     

    Your product team cannot be the only team involved in the decision. Ensure all departments are aware and help identify all dependencies.

     

  1. Give your customers plenty of notice

     

    Ensure when you announce the product sunset, you give your customers time to plan for a transition (ideally 6 to 12 months).

  1. Provide migration assistance

     

    Develop a smooth process to assist customer migration to another of your products or service offerings.

     

  1. Focus first on the biggest users of the product

     

    Prioritize your biggest, most valuable user first and ensure they are contacted via phone rather than email.

     

  1. Create content and programs that speak to your current customers’ concerns

     

    If your customers believe the migration will be difficult, create reference stories from customers that have already migrated. If your customers’ employees fear the change, employ change management experts to allay their fears.

     

  1. Focus on customer marketing

     

    When you discontinue a product offering, customers entering the buying cycle can easily become your competitors’ customers. Don’t assume your customers will move to your new offering. Maker sure they know how much you appreciate the relationship and ensure they understand the value they receive by continuing with you your organization and products.

     

Download our CTS CLTV Calculator to understand your true cost to service each of your products, estimate past, present, and future net revenue for a particular product, and classify each product in your portfolio.

 

 

Additional Resource

 

Are you going to make your number?

 

Leverage the SBI Revenue Growth Diagnostic for a few short minutes using this tool to determine if you are likely or unlikely to make your number. Once completed you can evaluate the effectiveness of your go-to-market strategy. You can print, share, download, and email your results.

 

Interactive Workbook Revenue Growth Diagnostic

ABOUT THE AUTHOR

Jeff Traenkner

Helps companies overcome their biggest sales and marketing challenges to accelerate revenue growth.

As a Management Consultant with a solid technology background, my expertise is in creating and executing strategies to resolve business challenges. Being effective, though, also requires strong leadership skills. Among those, is my ability to …

 

  • Establish and maintain client relationships. Even with client-side turnover and reorganizations over the past 5+ years, I have built and nurtured enduring client relationships. One such relationship has generated over $1M in business revenues over the last year, with the opportunity to enter into a new market with an existing client.
  • Provide analytical leadership, structuring unstructured problems, suggesting and developing frameworks to resolve unique business challenges, guiding model development, troubleshooting issues, and guiding project teams. In one instance, I collaborated on an extremely complex contracting situation with multiple levels of stakeholders and a wide variation of control, in an area where the company had very little experience. I developed a new approach and model to assess market potential and led development of the internal approach.
  • Develop and mentor high-functioning, global teams. My philosophy in developing people and investing in their career growth has led to deeper personal relationships that translate to personal and professional development that benefits them and the company.
  • Manage beyond the present, which translates to being a forward thinker and then following through with the requisite actions to achieve the goals. Staying on top of industry trends and linking those trends with specific outcomes, has not gone unnoticed by my employers.
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