Poor performing products or services can be a serious detriment to your business, diverting valuable resources and finances from more successful ventures and pulling down the overall profitability of your entire business. So knowing when to pull the plug on a poor performing product or service is important.
Some signs which may indicate that a product is a dog and should be considered for divesting include:
- Low profitability
- Declining sales/market share
- Costly to maintain
- At risk of disruption/technical elimination
- Doesn’t align with the vision/purpose of your organisation.
Our recent article Product lines…how much profit is enough? provides more guidance of how to assess whether a product is a dog, cash cow, star or wild cat.
Once you have identified a product as a dog it’s time to take action…but what exactly does that look like? Here are three common strategies for divesting a product.
Option one: could you harvest your product?
If you have a product that has lower profitability and slowly declining market share, but is still generating a positive cash flow it could be appealing to look at harvesting the product rather than eliminating it completely. Harvesting involves gradually phasing out a product by taking action to reduce production costs or increase the unit price without increasing costs. The benefit of this strategy is that you get to enjoy the profits from the product line for longer but you are starting to divert resources and attention to more profitable business opportunities. Once the product you are harvesting starts to generate negative cash flows, you need to divest it completely.
Option two: can you simplify a product line?
Sometimes product lines become less profitable because they are too complicated. For example, a company may have a number of product variations which require limited production runs, additional inventory and a larger marketing budget. To combat this it may be possible to simplify the product line by reducing the number of variations with a view to “standardising” the product and thus reducing associated production costs. The challenge however is maintaining your market share with reduced product options.
Option three: total line divestment
If there isn’t an opportunity to harvest or simplify your product lines you have one further option left – total line divestment. This means completing getting rid of a product that is not performing well. This can have a large knock on affect for a business as it may result in staff changes, negative sales growth and the perception of failure. However at the end of the day it’s a hard decision that may need to be made to protect other more successful product lines in your business.
Total line divestment can also mean selling the part of your business that manufactures that particular product. If you are in a high growth market or if you have a profitable product, but that no longer aligns with your company vision or is facing future technical disruption/elimination, this may be an option to consider.
Knowing which divestment strategy is right for your business is dependent on having a sound understanding of the financial performance of your product portfolio and the market attractiveness. If you are not confident about this, the starting point is to undertake a detailed product portfolio analysis with an experienced accountant/business consultant.