Knowing which products to keep, discontinue or invest more in will help drive profitable growth in your business, and whilst you might not have heard of a ‘product portfolio review’ you’ll likely have heard of a ‘cash cow’.
I work with many SMEs who are looking for simple tools to guide decision making. Here I explain how to use a popular strategic planning framework and provide hints and tips for interpreting the results.
What’s a product portfolio review and why you should be doing it.
Firstly, a portfolio review is just as relevant for a service business with highly customised solutions as it is for an eCommerce business with thousands of product lines. It’s a way of evaluating the performance of your products and deciding how best to allocate resources, such as where to invest marketing budget.
It’s good practice to do this annually and it needn’t be time consuming. Many organisations conduct this in Q4 to feed in to 2024 planning and use it as the basis of quarterly business reviews to monitor progress.
Components of the matrix explained
There are lots of descriptions online, this is what I hear from small business owners:
Cash cow. These products have been around a while. They might not be the most innovative or highest growing range, but they have a loyal customer base and contribute significant revenue. Cash cows are the products you might think “if we did nothing, we’d still sell some”.
Rising star. These are the new products taking off, customers love them, and the internal team are excited. You spotted an opportunity early and as well as being popular, they’re in an expanding market. Not yet the biggest revenue contributor but noticeably the fastest growing.
Question mark. These products are a bit of a puzzle. They're in a market that's growing and seem to fit customer need. You might have thrown lots of activity at them, but sales aren’t where you’d expect and you’re not sure why.
Pet. These products have also been around a while, but sales are flat or in decline. Perhaps they have a good competitive position but are hard to sell, require a lot of customer support or are low margin. You’ve likely discussed discontinuing them several times but they’re still available.
Mapping products on the grid
Based on these definitions start to plot your product categories on the grid. Different size bubbles are a useful way to visually represent the size of category.
This isn’t an exact science and is not something to spend days analysing (unless you want to). The goal is to get a relative sense of where each category currently sits. What’s essential at this stage is being honest and objective, this isn’t about where you’d like them to be. It can be useful to have a few people do the exercise and discuss.
Making sense of the results
There is no single ‘right’ answer and the results are unique to every business based on your industry, competitors, customer expectation and overall strategic objectives. However, there are some general strategies and considerations when reflecting on where your products are on the grid:
Cash-cows might sound attractive but over-reliance could be a risky strategy for the future. What drives revenue in your business today probably won’t in 1-3 years as markets mature and customers switch. Being slow to react to these shifts is one of the key reasons businesses with a historically strong position experience a growth stall.
Make sure these products don’t become your next ‘pet’ by keeping them front of mind and relevant to customers, and proactively invest in new products.
Stars are a great way to showcase innovation and stay ahead of the competition. New product development can be expensive and it’s important they fit with the overall brand proposition, existing sales channels, and customer segments (or have a rationale for why they don’t). New products also require more marketing, and it can take time to build traction in the market.
Make some strategic investments without over-stretching. Be realistic with revenue projections and what’s involved in launching new products.
Question marks might be products that were expected to become top sellers. They can be the most intensive in terms of resource and it’s crucial to understand the next step for these products. Objectively review sales projections and if were they too ambitious, do you have the right price, sales and marketing tactic and target customers?
These products need an action plan to move out of this box. Beware of sunk-cost fallacy.
Finally, there are the pets and most businesses have them at some point. There’s often a reluctance to discontinue these products as they generate ‘some’ revenue. Be aware they can dilute the overall brand and customers can be outfaced with either too many, or inferior, choices. There may also be hidden costs associated with inventory or supply chain and the temptation to continue some marketing efforts.
Don’t leave them languishing and consider a plan to replace with refreshed products that provide a better return.
Mitigating risk
- Arguably a diverse product portfolio mitigates risk. Too heavy a concentration of products in any one quadrant is unlikely a sustainable strategy.
- All cash cows and rising stars might suggest you’re operating in a high growth market, which tends to attract more competition. Do you have the right resources to sustain your position.
- Understand where each category is in its lifecycle. Question marks and pets are part of business and products naturally follow a lifecycle. Invest time and budget proportionate to revenue potential.
- Also consider the diversity of sales and marketing channels as well as target customers. Too many could be adding lots of complexity and cost to your business.
Managing a broad portfolio
- Ensure brand alignment; do all categories fit with the strategic objectives of the brand? Reflect on what are you passionate about, what are you good at and what can you make money from.
- Consider complementary products as stars. Cross- and up-selling can increase revenue from existing customers and overall improve lifetime value with lower risk.
- For large product catalogues, think about how to effectively guide customer choice to the ‘best’ product; this might be decision widgets or optimised search and filters on a website.
- For service businesses, high levels of customisation can be a USP. Consider which add-ons or customisations are requested most frequently as ‘productising’ could make it more repeatable (and therefore profitable).
Ultimately the optimal mix is unique to your business. Ensuring you are regularly reviewing the competition, listening to customers, and matching this with what your business excels in will support sustainable and profitable growth.
Goal setting for 2024
Insights from the portfolio review will form the foundation of strategic planning in your business. Next you are ready to set goals for 2024.
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