Your product is the bread and butter of your business. But do you know how profitable it is?
Tracking product profitability is essential for any business, small or large. It reveals your best-performing products, makes you think about why one is selling more than the other, and gets you to take a hard look at how you're spending your money.
At June, we'll walk you through everything you need to know about a strong product profitability analysis. We'll discuss the different types of data you need to track, and explain how to use that data to make informed decisions about your products. Plus, we'll share some tips on how to improve product profitability overall.
Ready? Let's get started!
What is product profitability (and its analysis)?
Product profitability is a financial metric that tracks the amount of revenue generated by a product, minus the costs associated with producing and selling that product. It's the profit that comes from your product. No surprises there.
So a product profitability analysis is simply an examination of this metric. As you'll see in later sections, this means looking at the true costs to produce and distribute your product and putting them against the total revenue it generates from sales.
Why is knowing product profitability important?
It's important for companies to understand the profitability of each product they produce, sell, or distribute, as this helps them make business decisions.
By analyzing product profitability, a company can:
- Identify and push your bread-winning products in front of customers more with targeted marketing strategies.
- Allocate your ad spend more efficiently and make strategic decisions about promotional efforts.
- Intelligently adjust product prices with data on demand and discontinue unprofitable items.
- Maximize revenue by cross-selling or up-selling other products with profitable ones (and leave more room for other inventory).
Who's responsible for a product's profitability in the company?
While all departments share the responsibility of trying to make a product profitable, one team has some more sway than others – and that's the product team. It's their responsibility to study the market and users in order to create a product-market fit, such as:
- Identify the product's total addressable market
- Gauge the interest and demand of potential users
- Determine the resources (people, time, and budget) it'll take
- Price a product right to maximize profit and market share
How to Do a Product Profitability Analysis
A product profitability analysis requires two types of data: data on your costs to run and distribute a product, and data on the revenue it generates. Let's discuss each in more detail.
Determine your true cost
Many things will go into calculating the true cost of producing a SaaS application – you'll need to consider some fixed and variable costs like:
- Direct labor: The wages paid to employees who work on the product.
- Marketing (e.g. ad spend, content marketing, influencer marketing)
- Customer support
- Server/infrastructure costs (e.g. web hosting, database)
- Office space and applications
- Legal and professional fees
- Overhead: Indirect costs associated with running the business, like rent, utilities, and insurance.
Calculate the product's total revenue
Once you have the total costs, you'll need the revenue figure to do the math on product profitability as we mentioned earlier. And revenue of course is the amount of money your product reels in.
So a $15 monthly subscription with 7,000 signups is going to be $105,000 in revenue.
And your profit will be the amount of that $105,000 left over after subtracting total costs to support the product. What you take home will depend on if you've accurately evaluated your costs.
Knowing the market price of a feature can help you figure out how much people are willing to pay for it. This applies to both items already in production and new ones a business wants to make. A lot goes into gauging an item's market price, like:
- Prices from competitors
- Prices at retail and online
- The product research
- Saturation of the market
- Trends in the economy
Important: Make regular assessments
A product profitability analysis should be a regular assessment that companies do, not a one-time event. This is because a product's true costs and the revenue it generates can change over time. So with new reports, you'll be able to monitor changes in a product's performance and place them into categories like "growth," "core" and "probation."
- Growth: Products in this category should bring in more revenue than it costs to support them. They might not be generating a profit yet, but they're on their way. The goal is to keep these products growing until they become profitable.
- Core: These are your bread-and-butter products that are already profitable. But don't stop here! There's always room to increase profit by improving efficiencies in production or marketing.
- Probation: These are products that aren't currently profitable, but have the potential to be with a few tweaks. This is where you'll want to focus your attention to get them back on track.
- Discontinue/Sunset: If after making changes, a feature still isn't profitable or aren’t used by your customers, it might be time to discontinue it. But don't make this decision lightly – there could be other factors at play that you're not considering.
When products move from one category to another, it'll have an effect on your company's bottom line. So by regularly assessing your product profitability, you can make strategic decisions that will have a positive impact on your business.
One way to do this is by looking at your feature retention overtime using June’s feature release report:
When you notice a declining trend, use the opportunity to dig into specifics on where users drift away from your product. You can see when a user signed up, when they were last seen, and the series of events that went through before they left – so you know where you might be able to pick up some slack.
How to increase product profitability by analyzing your product usage data
The surefire way to increase product profitability is to take a closer look at how your customers are using your products. This data can help you make informed decisions about which products to keep, discontinue or invest more in.
There are a few things you'll want to look at when analyzing your product usage data:
What are your most-loved features? Least-used?
Conduct a feature audit with reporting tools like June and gauge how much some features are being used in relation to others. By visualizing this in graph charts, you'll be able to optimize your onboarding by pushing the right features in your workflows to get users to fall in love with your product faster.
For example, Ghost.org (a content publishing platform), noticed in their free-to-paid conversion funnel that they picked up 10x more signups for the pro version when people added a custom theme to their blog post, compared to sticking to one of the default themes.
With this newfound information, the team at Ghost updated their onboarding walkthrough with a quick how-to on how to set a custom theme and made it very easy to do so with a couple of clicks. Then they made some more observations and created a 5-step process incorporating some other loved features attached with textual and video guides if you need them.
The great thing about June's reporting analytics is that you can test different activation journeys (different combinations of events) with real-time signup data to see what has the most potential to trigger the "aha" moment in users, where they make the decision to convert to your paid plan.
Look over when your users are most active & find out why
Are there certain times of day, week or month when usage of your product spikes? If so, what's driving that activity? If you can identify the reasons behind these spikes, you can replicate them to keep users engaged with your product.
User activity data can also help you troubleshoot problems. For example, if you see a sudden drop-off in usage, you can investigate to see if there's a particular reason for it (e.g. a change in the product, a bug, etc.) and take steps to fix the issue.
To get started, use June to take a look at your product usage data and see if you can identify any patterns. Once you've done that, you can start digging deeper to find out what's driving those patterns.
What are your power users doing differently?
Chances are, your most active users are getting more value out of your product than other users. Now you can refine your customer personas and gain more clarity on who's bringing in the money.
To find out what sets your power users apart, take a look at their usage data. Are they using features that other users are ignoring? Is there one price plan that gets more purchases than others? If so, why? Is there something you can do to make those features more visible or easier to use? How can you use this data to find upselling or cross-selling opportunities?
You can also try reaching out to your power users directly and ask them for feedback. Find out what they like about your product and what they wish was different. This feedback can be invaluable in helping you make your product more user-friendly and valuable for everyone.
By taking a closer look at your product usage data, you can learn a lot about how to improve your product and increase its profitability. So don't wait — get started today! June sends you notifications on top users ranked for a specific feature.
Start making your SaaS product more profitable with June
All in all, gauging product profitability is very important for all businesses whether you're a B2C or B2B company. It allows entrepreneurs and product managers to make calculated decisions on where to allocate their resources in order to increase ROI.
If you want to track your product profitability but don't know where to start, we recommend using June – a nifty analytics tool built on top of Segment that automatically generates charts for the most important metrics companies should track. This makes it easy to get started and saves you a lot of time in the long run.
What's more, June offers a free trial so you can try it out before committing to anything. So why not, give it a shot today and see how it can help you take your product to the next level?