Product Mix Strategy: Boost Gross Margin Effectively

Learn how to optimise product mix strategy using gross margin to maximise profits.
June 21, 2025
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Understanding Product Mix Strategy for Profit Maximisation

In today's competitive marketplace, understanding and implementing an effective product mix strategy is crucial for enhancing gross margin and overall profitability. Key to this is applying the 80/20 rule, which suggests that a small percentage of SKUs often drive the majority of gross margin. This article will guide you through the process of optimising your product mix using data-driven approaches.

The 80/20 Rule in Product Mix Strategy

Also known as the Pareto Principle, the 80/20 rule is a powerful tool in product management. It highlights that 80% of a company's profits typically come from 20% of its products. By identifying these high-performing SKUs, businesses can focus their efforts on what truly matters, enhancing their overall gross margin.

Margin-Demand Matrix: Classifying Products

The margin-demand matrix helps classify products into four categories: heroes, sleepers, cash cows, and dogs. Heroes are high-margin, high-demand products; sleepers have potential but low current demand; cash cows generate steady revenue with minimal effort; and dogs underperform on both fronts.

  • Heroes: Focus on promoting and expanding.
  • Sleepers: Consider marketing strategies to boost demand.
  • Cash Cows: Maintain with minimal investment.
  • Dogs: Evaluate for discontinuation.

Steps for SKU Rationalisation

The SKU rationalisation process involves several key steps: analyse, score, test, and decide. Each step is crucial in ensuring your product mix aligns with business goals.

Analyse: Use data analytics to evaluate SKU performance. Focus on sales, margin, and demand metrics.

Score: Assign scores based on performance metrics to prioritise SKUs.

Test: Implement changes on a small scale to measure impact.

Decide: Make informed decisions on SKU continuation or discontinuation based on test outcomes.

Case Study: Impact of Dropping Low-Margin Products

A practical example demonstrates how dropping low-margin dogs can free up working capital and increase overall gross margin by 3%. This approach not only boosts profitability but also allows for reallocation of resources to higher-performing SKUs.

Setting Guardrails for Team Alignment

Ensuring alignment between merchandising, finance, and marketing teams is vital. Establish clear guardrails to guide decision-making and maintain focus on strategic objectives. Regular cross-departmental meetings and shared KPIs can foster collaboration and keep all teams aligned.

Conclusion: Taking the Next Steps

Optimising your product mix strategy is a dynamic process that requires ongoing evaluation and adjustment. By understanding the principles outlined here, you can enhance your gross margin and drive sustainable business growth.

For further reading, explore our comprehensive guide on SKU rationalisation and discover additional tools to aid your strategic planning.

Ready to boost your gross margin? Implement these strategies today and watch your profits grow. Start now!

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