How to Determine an Optimal Product Mix
Product mix refers to the variety of products a business offers its customers. Both manufacturers and retailers must determine the optimal product mix for their particular business. An optimal mix maximizes the potential unit sales while maintaining -- or ideally improving -- the company's profitability. When determining your product mix, you must balance both the short-term and long-term goals of the enterprise. For example, a mix that results in the highest sales for the upcoming year may not set the company up for future growth.
Your highest-profit-margin products are not always your best sellers in terms of unit sales, but they contribute the most to your bottom-line profits. In times when unit sales are slow, having the higher-margin items in the mix gives you a better chance of staying profitable until better industry conditions return and sales volume returns to normal.
A major key to the success of any business is offering products that have a large and growing market. This means you can acquire new customers entering the market rather than having to battle your competitors for existing customers -- which may require cutting your prices. Even if the recent sales of a certain product have been lower than you would like, consider its long-term potential as well. If you continue to devote marketing resources to the product, it can begin to achieve a higher sales trajectory if your estimates of the market size growth were correct.
Certain products contribute to your overall sales growth by working in combination with other products, so the customer is encouraged to buy both. Grocery stores' shelves are filled with products like this, such as corn chips and salsa. The margin on the corn chips may be lower than the salsa, particularly the gourmet varieties, but the customer needs both products. By having both products in the mix, it increase total sales potential.
Product line extension means introducing new products in the same general product category that have subtle but readily identifiable differences. By adding these similar products to your mix, you give your customers greater product choice, increasing the likelihood they will find a product that exactly meets their needs. Extending a product line allows you to sell more to your existing customers. Increasing the variety of products in the mix also encourages customers to try your new products because of the satisfying experience they have had with prior purchases.
Marketing theorists say that many products and companies evolve through four patterns of sales: introduction, growth, maturity and decline. It is imperative that if you recognize that some of your traditional best-selling products are entering a maturity phase when the rate of sales growth begins to slow, that you have new products on deck to replace them and maintain the sales momentum you have achieved. Make sure you allocate time and resources to creating an environment of innovation in your company. Look for emerging trends and design products that meet these changing customer needs and preferences. Your product mix design planning is much like the strategic planning you do each year -- it has both a short-range, one-year plan and a long-range plan that looks out three years or more.