Lessons in Profitability: What does your Product or Service really Cost?

The goal of every business owner is to make a profit.  Just make sure that the price you charge for your product/service is more than the cost.   Sounds easy enough, right?  Well, you would be surprised how many business owners don’t know the real cost of their product/service.  I find this happens especially in service businesses and it is compounded for businesses that have more than one service offering.


An example is the business that provided five types of services.  The business owner didn’t understand why profits were falling, even after launching the new “highly profitable” service offering just a few months earlier.  The answers were readily apparent after doing a cost analysis.  The first problem was that the largest and “best” customer, which accounted for a large part of total revenue, had been sold one level of service but was informally receiving a much higher level of service which cost much more than the business owner realized.  Second, the new “highly profitable” service was actually priced below cost when all the costs were aggregated.  Lastly, the business owner had an idea of the average direct cost for each service, but he failed to account for the indirect costs (admin, R&D, vacations, training, etc) in his pricing matrix.  The result was that he was pricing EVERY service at breakeven with no profit.  Then he wondered why the business was not making a profit!


All of these issues can be fixed.  The key is understanding the real cost of your product/service.  This is the type of business analysis that a good CFO should do.  But many growing businesses simply can’t afford to hire a full time CFO.  That’s when a Fractional CFO can add tremendous value.