4 Times You Should Drop a Product or Service
Simon and Garfunkle’s song “Kodachrome” gets played on the radio every day, but the iconic film itself is now a just a footnote in history. The last 35mm cartridge of the film rolled off the Kodak assembly line in 2009.
As you can probably imagine, dropping the production of Kodachrome in the age of digital cameras was a fairly easy – and obvious – decision to make at Kodak.
Yet, the Kodachrome story captures a Kodak moment that teaches a good lesson for all small business owners: Move quickly when markets change and products cease to contribute to the bottom line. I say this because within three years of Kodachrome’s demise, Kodak itself declared bankruptcy.
With that lesson as a backdrop, let’s examine four cases when you should drop a product or service from your offerings.
1. When the product is losing money. Although this seems obvious, the situation needs to be carefully considered. The entire cost of a product includes the cost of goods sold (the raw materials or inventory), the variable direct costs incurred producing and selling it (for example the salaries of account executives or product managers) and the indirect costs, such as the product’s portion of rent, utilities, insurance, and other costs of doing business.
If you add all of these up and they amount to more than you’re making via selling the product or service, you’re losing money, on paper at least. However, two things need to be considered:
- Are you correctly assigning variable direct costs and indirect costs?
- Will indirect costs actually decrease if you drop the product?
I’ve seen business owners fool themselves about the profitability of business ventures or products because they haven’t properly assigned costs. They may have a “pet” area of their business that they want to believe is more profitable than it is, so they dump costs on a part of the business that they aren’t so fond of.
This error always comes home to roost!
Secondly, if indirect costs will not go down, then those costs will end up being assigned to the surviving products or services, lowering their profitability or pushing them into loss territory. This could cause a “death spiral” for your company.
2. When opportunity costs are significant. This point is related to many of the other points listed here. For example, in the cost scenario outlined above, you could avoid the “death spiral” if you had a new product or service that would take on the indirect costs and show a real profit.
In other words, if a product isn’t performing well, on some level it’s keeping you from pursuing other opportunities. Lost opportunities are a real cost, as the demise of Kodak proved. Frankly, in the very first days of digital cameras, Kodak made a good product. However, other makers were soon leaving Kodak in their dust. Had Kodak been able to focus on and develop its digital cameras more quickly, perhaps it would be an industry leader today.
Did continuing to allocate resources to film products weaken Kodak’s position? I think the answer has to be yes.
As a small business owner, you must always be weighing the potential of new products and services against your legacy products and services.
3. When a segment of your business becomes a distraction. I’ve seen small business owners add offerings that are at best only faintly related to their core business. (How about a coffee shop offering a fax service?) They do this sometimes in the hope that the new venture will develop into something, however, it rarely does.
Nonetheless, in these cases, the small business owner is left with this vestigial appendage to the company. It may be generating a little income, so it’s hard to cut it loose. The approach to take here is to either drop it remembering our opportunity loss criteria, or try to sell it to someone for whom it’s a better business match.
4. When you can move customers into another product. Sometimes we give customers too many options. I think, for example, that Baskin Robbins would sell just as much ice cream with 30 flavors as they do with 32 flavors. In fact, you see this strategy often in the restaurant business.
When Gordon Ramsay throws himself into saving a floundering restaurant on his “Kitchen Nightmares” television series, he almost always makes the restaurant owner simplify the menu. It stretches kitchen help too far when the menu is so big and it creates all kinds of supply problems.
If you’re offering 16 versions of your widget, I bet you wouldn’t lose any business if you pared that down to 10 versions.
Smart small business owners are always looking toward the future and assessing which products have peaked in popularity. Like the management in great professional sports teams, they are scouting the field for tomorrow’s stars.
Sometimes it’s difficult to say goodbye to an old standby, but it can be the best decision you ever make.
Image: Kodachrome 64, by Mailbox (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons.