It might seem counter-intuitive to keep a product that is consistently losing money, but you need to look at your product portfolio as a whole before cutting the loser from your mix.
Not every product can be a success. In fact some products are lucky to break-even. The worst offenders are the products that can't even manage to cover the cost of manufacturing them. Usually companies immediately cut their losses by eliminating these poor performers from their product mix. There is another strategy that might be more beneficial.
How it happens
On paper, a product might consistently lose money if sales do not cover the variable costs of manufacturing a batch of that particular product. You might have to manufacture 1,000 units at a time because of your processes. If you only sell 500 of them and the profits aren't high enough to cover the costs to manufacture 1,000 units, then on net you have lost money.
Losing money is never good. You need to figure out how to eliminate the losses so that you at least break-even.
You can't raise the price of the product to cover variable costs without losing a bunch of sales. You can't lower the price to increase the number of sales because you sell the same amount of the product at this price and any price lower than the current price. So you are left with either cutting the product or keeping it.
An obvious option is to eliminate the product. This way you will not have the consistent loss. Problem solved right? There is the possibility of unforeseen consequences. You should keep it the losing product because of how it interacts with the total product portfolio.
Why keep a loser?
The answer lies in looking at the overall product portfolio and not just the performance of the individual product. We said that the loser was not covering its variable costs, however the sales revenue does contribute to covering fixed costs.
Fixed costs include manager salaries, utilities, lease space, etc. that must be paid even if you sell zero products. These are the typical costs of doing business. Usually these costs are spread out over the total product portfolio and all products pay for these things. It might cost $10 to manufacture a product in materials, labor, etc., but then another $3 is tacked on to it to cover other fixed costs.
So if you completely eliminate a product, you would cut out its variable costs, but the fixed costs must be covered. With one less product, the rest of the product portfolio must absorb the costs. This could lead to another product performing poorly because now the profits from it do not cover the additional fixed costs.
As you can see, many factors must be considered before cutting an underperforming product. A loser on the surface might be a huge help when you look at the whole picture.
Ethan Hausmann is currently the Vice President of Marketing and Community Outreach for Successtar Enterprises LLC. He is an author, professional speaker, and seminar/workshop instructor. Ethan has extensive knowledge and experience in marketing, customer service, leadership, and other small business related concerns.