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Do you want 10% of $5M or 36% of $2.5M?

I once told a business leader that they needed to kill a $5 million product category after a 10 minute analysis.

So here is what happened, I was working with a company that sold multiple products and one of those products generated $5 million in sales. This was a huge deal that they were excited about so I dug a little further to analyze the gross margin. I lined up all of their products side by side and quickly noticed that the margin for this $5M product category was less than 10%. On the other hand another product category had a margin of 36% and the backlog and sales trends were steadily growing.

After asking a few other questions I confidently said STOP selling the $5M product category and shift more effort to the 36% margin product.

Within a few months the business completed the transition and the employees and business leader got a much bigger bonus that year. Needless to say people were happier with the change.

If you are running a business you need to understand your gross margin (sales - product cost) and it is best if you can view this across all of your products. If you study your gross margin closely you can find phenomenal opportunities to help your business.

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