[TachiFigures] Profitability analysis for an enterprise software product

This analysis was produced as a part of my TachiFigures Agency and has been altered with the permission of the client before reproduction.

A $50M ARR enterprise software tool is preparing for their next product roadmap sprint. Their product roadmap is packed with initiatives of varying levels of urgency, growth potential, and resource spend.

It is a lot to keep track of!

Sharon, the product owner, has intuition around where the priorities are. However, Sharon wants to confirm her intuition aligns with what the data says. Is her roadmap prioritized according to where their budget dollars should be spent?

One rule of thumb is that companies should double down on where the profit centers are.

This means capturing more customers that "look like" their most profitable customers. This means allocating resources towards the product lines contributing most to the bottom line.

With this in mind, TachiFigures built a Customer Profitability Analysis and Product Profitability Analysis to determine where the team's resources should be focused.

What is a customer profitability analysis?

Customer Profitability Analysis (CPA) is a financial analysis that helps a business understand the profitability of its customers. CPA is used to determine which customers generate the most profit and which customers may actually be costing the business money.

What is a product profitability analysis?

Product Profitability Analysis (PPA) is the same thing as a CPA except it maps out the profitability of products, not customers. Similar to the CPA, the PPA is used to determine which products generate the most profit.

Sales is on the X axis and profit margin % is the Y axis. A business's objective to generate the most sales in the buckets where profit margin is also highest. It is arguably a best practice to sunset the products or customers with lowest profit margins if this means the business could expand sales in the higher margin buckets.

What's involved in a CPA and PPA?

The task of evaluating this type of profitability analyses requires work around two key areas of work:

1. Allocating expenses across customers and products

To conduct a CPA or PPA, a business starts by identifying its customers and collecting data on their revenue and costs.

Revenue data includes the total amount of sales made to each customer, while cost data includes the direct and indirect costs associated with serving that customer, such as marketing and sales costs, shipping and handling costs, customer service costs, and any discounts or promotional offers provided to that customer.

This is often the most time-consuming piece because it is often a group effort to determine how indirect expenses should be split across customers.

2. Defining customer cohorts so that the data output is actionable

Identifying the most profitable and unprofitable areas for future investment is only actionable

in the way the areas are defined.

For example, the knowledge that Customer A is more profitable than Customer B does not give a manager much insight into how to attract more customers like A in the future.

That's where it helps to properly segment customers into actionable buckets.

What is it about Customer A that makes them more profitable? Is it their industry, size, stage of company life cycle, or complementary integrated products? Splice the data across these different segments until you see a pattern where you can draw conclusions.

For example, if post-Series A funded DevOps software customers are the most profitable, then it might make sense to prioritize product growth that will attract more post-Series A funded DevOps customers.

Here is the final analyses.

Customer buckets are sorted by sales descending from left to right:

Customer Profitability Analysis

*Customer cohorts:

A: Ecommerce

B: Mobile apps

C: Professional Agencies

D: Games

E: SaaS

F: Business Software

G: Fintech

H: Internet of Things

I: Service Industry

J: Media

K: Edtech

L: Consulting

Product Line Profitability Analysis

Product line buckets are sorted by profit margin descending left to right:

The TachiFigures Recommendation: Identifying the 80/20

These charts visualize which customers and product lines are most profitable and which are least profitable.

This information can be used to make informed decisions about how to allocate resources, adjust pricing and promotional strategies, and make other changes to improve profitability.

In a perfectly optimal business, the biggest sales buckets should have the highest profitability margins.

The 80/20 rule, also known as the Pareto Principle, states that 80% of effects come from 20% of causes. In other words, a small proportion of inputs or efforts usually accounts for the majority of results.

Based on the charts above, TachiFigures recommends Sharon focuses the product team's efforts on the features supporting mobile apps, professional agencies, SaaS, business software, and IoT customers. We recommend deprioritizing any initiatives focused on the game or ecommerce customer cohorts.

We also recommend expanding sales for the Workspace product while deprioritizing the Advanced Security product, knowing the latter is a cost center that does not contribute directly to the overall profit.

Of course, an analysis like this needs to be paired with a good understanding of the customer. Perhaps the Advanced Security is the entry point product for lead generation.

Thanks for reading! The customer and product profitability analyses are powerful tools for understanding the financial impact of individual customers on a business and can help businesses make more informed decisions about how to manage their customer relationships and product offerings.

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