Small-Business Success Comes From Understanding Product Profitability

Last Updated Apr 7, 2009 9:26 AM EDT

Many small business owners lack a fundamental understanding of how their operation makes -- or doesn't maket -- a profit. We tend to look at the profit-and-loss statement from too high a level.

The key is to truly understanding how your business works and its capabilities for generating more revenue and profit is to get down in the weeds to develop a deep understanding of the cost structure of each product sold, says Dick Harrington, former CEO of Thompson Corp., in an insightful interview at Harvard Business Publishing, Do You Really Know Where You Make Your Money?
But isn't such product review a difficult process? Says Harrington:

"Not quite; you can categorize products. And if you're small, you can estimate and be approximately correct. For example, if one product is consuming all your customer support resources, you want to account for it. But for small changes in floor space usage, for example, you probably don't need to factor that in. Being approximately correct is good enough; you don't need to have perfect information to make the right decision."
Look to Harrington's post for more details on how to analyze product costs, get competitive data and prioritize efficiencies.
  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.