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.
Higher-Margin Products
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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.
Growth Potential
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.
Cross-Selling Potential
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.
Line Extension Products
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.
Life Cycle Considerations
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.
References
About the Author
Brian Hill is the author of four popular business and finance books: 'The Making of a Bestseller,' 'Inside Secrets to Venture Capital,' 'Attracting Capital from Angels' and his latest book, published in 2013, 'The Pocket Small Business Owner's Guide to Business Plans.'
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Before you can get your business mix right, you first need to know what your business mix is. As an eCommerce Manager, I ask the hotel in each meeting what their business mix is. Every Revenue Manager, General Manager and Sales & Marketing Manager should know this information. There should be clear targets set for each market segment for the year. These targets should be for both occupancy and average room rate (ARR). The hotel's business mix gives all departments a clear picture of the hotel's target market and how well they are doing to achieve budget. Below are a few steps to follow that will help you optimise yours.
Step 1 – Review your current business mix
The first thing that you need to do is to review the business mix that is currently in place. The Revenue Manager will need to extract all of the data for at least 2 – 3 years previous based on stayed business by week.
Step 2 – Identify all market segments
Decide the relevant name for each of your market segments and determine who falls under each segment. Ideally you should have no more than 10 segments in your distribution mix. Here is an example of some market segments which might apply to your hotel:
- Corporate
- Leisure Direct
- Leisure OTA
- Leisure FIT
- Leisure Groups
- Leisure Phone
- Walk-ins
- Conference
- Complimentary/Discount
- Wedding
Step 3 – Input your extracted data into the relevant segment
Once the data is input under each segment, you will get a clear picture of what your business mix is, broken down by week. For example, you might see your OTA business is delivering 35% of your revenue and your direct business is only delivering 25%.
Decide the relevant name for each of your market segments and determine who falls under each segment. Ideally you should have no more than 10 segments in your distribution mix. Here is an example of some market segments which might apply to your hotel:
- Corporate
- Leisure Direct
- Leisure OTA
- Leisure FIT
- Leisure Groups
- Leisure Phone
- Walk-ins
- Conference
- Complimentary/Discount
- Wedding
Step 3 – Input your extracted data into the relevant segment
Once the data is input under each segment, you will get a clear picture of what your business mix is, broken down by week. For example, you might see your OTA business is delivering 35% of your revenue and your direct business is only delivering 25%.
Step 4 – Cost of Distribution
Understanding the cost of distribution for each market segment is essential before you budget. The Accounts department should be able to assist with analysing the cost of distribution for each market segment. Once you understand the balance between maximising revenue and minimising the cost of distribution, you are then in the position to budget. Some hotels who would have traditionally relied on OTA business have changed their strategy once they realised how costly this segment is for them.
Step 5 – Market segmentation for budgeting
Now that you know your current business mix, you need to decide what is your optimum business mix. Examining each market segment in relation to your hotel and market is a thorough exercise that needs to be done. Understanding your hotel's unique selling points (USPs) is critical to this process. You cannot be all things to all market segments! Targeting more corporate business might not make sense if your hotel has a noisy bar and nightclub. You won't have a segment for ‘walk-in' business if your location is in a rural setting. You may find you are accepting too many groups which is affecting your ARR. It is difficult to budget exactly for each market segment but having relevant market segments for your hotel and pricing by segment gives focus and accountability to all departments.
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Step 6 – Review
The benefit of understanding your business mix and budgeting based on your segmentation is that it gives your hotel a clear road-map. The data needs to be reviewed on a weekly and monthly basis. If you had budgeted to increase your direct website business by 10% and it is only up 5%, the key stakeholders need to understand why and if less profitable segments are performing more than budgeted what this means to the bottom line. This gives the hotel more control. It attracts more intelligent, data focused personnel to your business who understand the impact of market segments.
Step 7 – Communicate
There is reduced value to having market segments if this information is not communicated to all staff. Defining your market segments and developing a related strategy and budget is the cornerstone to a successful revenue management strategy. It encourages accountability and prompts constructive debate as to the hotel's overall vision.
Conclusion
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Getting your business mix right is not something that will happen overnight. In order to optimise your business mix you need to understand and research each aspect of it which can take some time. However, by following these steps you will ensure that it is a smooth and successful process. Do you have any other tips on how to get your business mix right? Let us know in the comments below!
