There is enough pressure on business managers without expecting them to read the minds of customers too. So, expect nothing short of miracles when it comes to the development of strategy and marketing decisions on existing and new product lines.
Mass customisation - marketing shorthand for meeting the individual needs of each customer - can look like an ominous anarchy to an unprepared managing director. Ominous because managers are expected to understand exactly how it operates, and anarchy because they don't.
How does the managing director make sound and logical recommendations about budgets, cash flow, financing, across a business that might offer between 50 to 5000 different products or services?
Product life-cycle planning can help to balance the cash flow and reduce risk across a product portfolio, but it cannot optimise the financial outcomes for that portfolio by itself.
Management of product portfolios as well as the task of developing product-costing scenarios has largely been left with the marketing department.
The two most regularly used product portfolio optimisation (PPO) methods are either, traditional costing, which uses a generic or simple algorithm to allocate most costs against product development, manufacturing, marketing and distribution or activity-based costing, using activity drivers to evaluate performance measures.
Not only are these methods costly and time consuming to implement, they fall short of providing important marketing information. For example, they don't allow for price comparisons with competitive offerings or incorporate strategic intent into the equation. More importantly still, they don't provide for gap analysis and portfolio optimisation, which can avoid product cannibalisation and ensure maximum portfolio profitability.
There is a better way, true product costing (TPC). TPC costs products with a high degree of accuracy, delivering the necessary information in an accessible format so management is able to optimise their product portfolio. While not everyone can afford to contract this kind on analysis to a third party, TCP contains some important aspects that can be implemented at any level.
TCP aims to ferret out some of the hidden costs associated with certain product lines, and to provide a long-term approach to market development. It does this by providing accurate forecasting of indirect costs; providing a costing tool to handle scenario analysis; offering a performance snapshot by product, market segment or category at a given point in time and showing cost adjustment for operational anomalies.
Ideally the results, when implemented, go straight to the bottom line.
Claudia Huertas is the executive director of the ACCP group of investment bankers and consultants, contact her on firstname.lastname@example.org