Many small business owners focus on generating more revenue every year, and that’s a wonderful goal. But not all revenue is created equally. Some items are more profitable than others. If you sell more than one product or service in your business, then you may benefit from looking at your revenue mix. A revenue mix is a calculation that determines the portion of each product or service a business sells relative to their total sales.
While it’s fun to watch revenues grow, your business profit is what really matters. If your expenses grow faster than your profits, you don’t get to keep as much of what you make.
An insightful exercise to try is to take a look at your revenue mix. Then you can ask “what if?” to optimize your profits. If you are interested in taking a deep dive into your revenue mix, reach out to Your Favorite Orange County Bookkeeper at Team One Accounting.
Your Revenue Mix
Let’s say you offer three different services: Services J, K, and L. Your revenue pie looks like this:
J: $700K or 70% of the total
K: $150K or 15% of the total
L: $150K or 15% of the total
Total: $1.0 million
In this example, Service J is clearly the service making you the most revenue in your business. But is it making you the most profits?
The profit you receive from each of these service lines is as follows:
J: $80K
K: $10K loss
L: $30K
Total: $100K
While Service J is generating the most profit volume for your business, it’s actually Service L that’s the most profitable. Earning $80K on $700K yields 11.4% return on Service J, but earning $30K on $150K yields nearly double the return at 20%. Service L generates the most return. And if possible, Service K may need to be discontinued or turned around.
Optimizing Profits
Your strategy for a more optimum revenue mix might be to sell as much of Service L as possible, while eliminating or fixing the problem around Service K.
It’s fun to experiment with different revenue mixes. And of course, there are many more variables besides profit, such as:
- What services/products do you prefer to work on/sell?
- Are you able to sell more of the most profitable service or are there marketing limitations?
- Is one service a loss leader for the others?
- Are you able to adjust price on the lower margin services to increase your profits?
- What does it cost you to provide the product or service?
There are many more questions to ask and strategies to consider to make you more money, which is why we love being Your Favorite Orange County Bookkeeper. We hope you’ll spend some time analyzing your revenue mix and having fun asking yourself “what if?” Team One Accounting can help you expedite the process or add our perspective. Let us know if you want our insight into your revenue mix!
