What is it?
When is it useful?
Portfolio profitability is most useful for companies with significant profit variations across their business.
This may be on different dimensions:
- Product. If you have high volume and low volume; premium priced and mass products; different types of products and services? Use Activity Based Costing to allocate overhead costs more accurately
- Customer. Does cost to serve differ across customers/segments? Does pricing vary greatly across customers? Pocket price waterfall may show that you actually lose money on some customers!
- Channel. Does pricing and cost to serve differ across channels?
- Geography. Different levels of competition may give you very different margin structure in different markets.
A variable width chart is the best way to show a snapshot of your portfolio's profitability. This example shows a portoflio split by product and geography
The UTC company's portfolio shown illustrates the points you will see in many FMCG portfolios:
- Niche premium products that are Low volume/High margin. These might be recently launched products that you can value-price before competitors match them, or your differentiated products for small customer segments (e.g. Herb Tea)
- Discount mass-market products that provide great volume and cover overheads, but are commoditised and therefore unable to achieve significant profitability (e.g. Private Label)
- Masstige/Branded products that represent the bulk of the portfolio's profitability, combining significent volumes with reasonable margins (e.g. Branded Tea)
How can you adapt this concept?
You can do this portfolio plot by product, market, segment, channel, business unit or customer