How to know which products are profitable in a small business. Ando Chong on the analysis most owners avoid, and why the answer is usually uncomfortable.
Ask an owner which part of the business makes the money and most will answer confidently and immediately.
Ask them to show you the numbers by service line and the confidence changes shape.
This is not a criticism. Most small businesses report at the top level, so profit is a single figure for the whole operation, and underneath that figure there is almost always one line quietly funding another.
You separate revenue and direct costs by service line, and you include the owner's time.
That last part is where the analysis usually breaks. Owners exclude their own hours because they are not invoiced, and so the service line that consumes the most owner attention appears to be the most profitable when it is frequently the least.
A service that only works because you deliver it for free is not a profitable service. It is a line that pays you nothing today and cannot be sold tomorrow, because the moment you stop working on it, the margin goes with you.
Do the analysis properly. Twelve months of revenue by line. Direct delivery costs by line. Then estimate owner hours by line honestly and cost them at what you would have to pay someone else to do that work.
The picture usually changes considerably.
Because the unprofitable line is often the one you love.
It is the original service the business was founded on. It is the technically interesting work. It is the thing you personally are best at, which is exactly why it consumes your hours, which is exactly why it does not make money.
It is not unusual for the service line carrying an owner's professional identity to turn out to be subsidised by the boring, repeatable line they slightly resent. That is a difficult afternoon. It is also one of the most valuable pieces of information a business ever produces.
Not necessarily kill it. There are four options.
Reprice it. Often the work is valuable and simply underpriced because it was priced years ago when the business was smaller and hungrier.
Redesign delivery. Sometimes the margin problem is process, not price. If it consumes your hours because only you can do it, the fix is documentation and training rather than a price rise.
Keep it deliberately as a loss leader. Legitimate, provided it is a decision rather than an accident. Some services win the client and other lines make the money. That is a strategy if you know it and a leak if you do not.
Stop offering it. The hardest option and sometimes the right one. Less is more. A narrower business with strong margins is a better business than a broad one with thin ones.
Each additional service line adds something invisible. More things to train. More things to quote. More things to keep current. More ways for a job to go wrong. More decisions arriving at your desk.
That is a real cost and it lands almost entirely on the owner, which is why owners of very broad small businesses are so often the most stretched.
When I talk about simplifying offerings, this is what I mean. Not doing less business. Doing less different business, so that what remains can be systemised, delegated and priced properly.
Twelve months. Revenue by line. Direct costs by line. Owner hours by line, costed honestly. One page.
Then ask two questions of each line. Does this make money at the price we charge, including my time? And if it does not, am I keeping it deliberately or by habit?
Most owners find one line to reprice, one to redesign, and one they have been carrying for years without knowing it.
Revenue is vanity. Size is ego. A business doing four things well at strong margins beats one doing nine things adequately, and the second business is usually the one where the owner cannot take a holiday.
You cannot make this decision without the numbers, and the numbers take an afternoon. That is a very good rate of return for an afternoon.
Separate twelve months of revenue and direct delivery costs by service line, then add the owner's hours costed at replacement rate. Excluding owner time is the most common error and it distorts the result.
Because your time has a real cost and a finite supply. A line that only works because you deliver it cannot be delegated, cannot scale and cannot be sold.
Not automatically. Consider repricing, redesigning delivery to reduce owner dependency, or keeping it deliberately as a loss leader. Discontinue it when none of those apply.
Complexity. Every extra line adds training, quoting, stock and decision load, and most of it lands on the owner. It rarely appears in the accounts and it is a genuine constraint on growth.
Annually at minimum, and always before adding a new service or making a significant pricing decision.
Anderson Chong, Founder of iQuest Consulting and Business by Design.
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