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What Factors Affect Product Profitability?

Determining product profitability takes into account all of the costs involved in producing a product.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 12 November 2014
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Product profitability is an important consideration for any type of business operation. The goal is to generate the most profit possible from every unit sold. This means paying close attention to every aspect of the operation, beginning with the purchase of raw materials to use in the production process, the methods of production utilized, and even the costs associated with the packaging of the product. Only by monitoring and controlling the costs at each phase of the operation can a business hope to maintain the highest level of product profitability.

The first step in positioning a business to enjoy a high level of product profitability is in the selection of the raw materials that are used in the manufacture of the goods offered for sale. Here, the goal is not simply to go with the least expensive materials. Instead, choosing raw materials that offer a combination of high quality and a competitive price should be the aim of the buyer. By using quality raw materials, the chances of manufacturing goods that have high product quality and are likely to attract the attention of consumers. Doing so may reduce the profit margin per unit a bit, but it will more than make up for the difference in terms of volume sales.

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Along with choosing the right raw materials, business owners will also want to make sure the actual manufacturing process is as efficient as possible. This means avoiding unnecessary steps within the process itself, as well as ensuring that waste is kept to a minimum. By continuing to evaluate and enhance the manufacturing process, it is possible to produce more goods per production hour and incur less waste of resources at the same time. This results in an overall lower production cost per unit, and a higher profit from each unit sold.

One factor associated with product profitability that some companies overlook is the packaging for the finished product. While most will consider the packaging in terms of visual appeal, there is sometimes less attention to the type of materials used. In some cases, it is possible to utilize less costly materials for labels and other packaging elements without having an adverse impact on the look of the product. Even a small savings on the packaging helps to increase product profitability significantly.

Businesses of all sizes and types can benefit from considering product profitability. While the process in years past was mainly manual, there are product profitability analysis software packages on the market today that can be adapted to any business setting. Simple tools like profitability worksheets make it easier to look at gross profit, net profit, the number of sales that can be anticipated after certain changes are made, and even projections of the cost of product marketing can be included in the assessment. While the software is sometimes a little costly, that cost is usually offset by gains in the amount of profit earned per unit within a relatively short period of time.

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