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How to calculate your product profitability

Product profitability is used to let your company know how profitable a certain product is. You can figure product profitability by multiplying the unit sales volume by the profit margin of the product. The result will give you the overall profit for that product but to find its direct product profitability (how much the product makes compared to how much shelf space it uses) you need to divide the overall profit by the shelf space that it uses. For example if your profit for the product is two thousand dollars and you use one hundred centimeters of shelf space your direct product profitability is twenty dollars per centimeter. While this does not seem that hard to do product profitability can get more complicated if you sell numerous products and it can get complex because of all of the different costs that are associated with the product, etc.

Because some many businesses are using product profitability to determine if they should continue using a product or to help determine what their better products are, computer software has been created to help you determine product profitability.

Need for accurate product costing:
- Companies need to know exactly what goes into the cost of a product so that they can answer the following questions when reviewing their product portfolio
o Which products are worth keeping
o Are all product-related costs being passed on to customers
o Is product quality an issue
o If we drop a product will any resources be freed up, if so which resources
o What new product areas should the business invest in next
o What markets should we target for future growth

Because direct costing is becoming a thing of the past due to the increase of companies using value-added processes, which allows them to charge a product for marketing (product specific marketing), handling, inventory and support in order to gauge a product's profitability level accurately has become so complex that computer software is actually needed, you can no longer use traditional methods of standard cost accounting to determine it.

What the software includes:
- Accurately determine product cost and profitability in environments like manufacturing, distribution, retail, and many other types of businesses.
- Platform for the assignment of all related direct, indirect and activity-based costs to products, channels, regions, and customers
- Provides analysis to let you know which products are profitable and why
- Scenario modeling that allows you test out new prices, processes, and services before you actually launch the product.
- The software also allows you to print a variety of reports. The reports that can be printed with this software are:
o Profit and loss statement by product and overall
o Product rankings for your executive staffs use
o Warranty scores
o Operational cost reports so you can make improvements as needed

Improvements in corporate profitability:
Computer software offers product profitability management solutions that will create huge improvements in your company's profitability by allowing for more accurate pricing, improved inventory performance (no more old inventory hanging around for months on end), perfect product mix, and a more effective market planning for your company to follow.

Product profitability management also helps company's determine the entire product costs (including fixed costs) and the actual profitability of each product that they have added to their portfolio. The software also allows you to test product pricing, product mix, and service strategies for your products (different types of warranties or technical support). But best of all this software allows you to monitor and manage all of your operations and see how it affects the overall profitability, as well as having the product profitability numbers available whenever you need them.

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