What Does Product Profitability Mean?
Profit is the amount of revenue that remains after accounting for all expenses, debts, and other costs. So product profitability, then, refers to how much money a product makes minus what it costs to build, sell, and support it.
Businesses also refer to profit as the bottom line. Although revenue is an important metric, a company can’t deem a product successful unless it earns a profit. As a result, if a product costs more to maintain than the revenue it brings in—it isn’t profitable.
Who Is Responsible for Product Profitability?
All departments across a company share responsibility for profitability. But one department has more responsibility than the others.
However, few businesses assign ownership of product profitability to any team, we believe product management has the most responsibility for launching products that earn a profit.
The product team is responsible for learning key details about their market and users, to help them build a solution that finds a product-market fit. Some of these strategic details include:
- The size of the total addressable market for a product
- The interest and demand levels of the potential user base
- The resources (measured in personnel, time, and budget) it will take to build the product
- The right way to price the product, to maximize both market share and profit
Therefore, applying these learnings correctly is necessary to building a profitable product. Because the product team is responsible for developing and successfully deploying this expertise, they should be held the most directly responsible for whether the product they develop is profitable.
How to Do a Product Profitability Analysis (and Why)
A product team might want to conduct a product profitability analysis for several reasons. For example:
- Estimate the potential profitability of a product idea under discussion.
- Determine which of a company’s current products are the most (and least) profitable.
- Analyze the revenue and costs of a product and learn if it’s turning a profit.
- Find out if there are ways to make a profitable product more profitable.
Here is a basic guide to analyzing the profitability of your product.
1. Calculate the product’s total revenue.
As we noted in the introduction, you first need to understand the difference between revenue and profit. Revenue is the amount of money your product earns—period. Thus, if you sell a SaaS app for a $20 monthly subscription, and you have 10,000 paid subscribers, that product’s revenue is $200,000 a month.
To clarify, profit is the amount of that $200,000 monthly income left over after subtracting all costs to support the product. So to learn if you have a profitable product, you will need to calculate those costs.
2. Add up all direct costs.
As such, direct costs for building and supporting your SaaS app should be straightforward. For example, it will include developers’ salaries, computers, and the other resources they need to build your product.
3. Add up all indirect costs.
In contrast, calculating indirect costs is more difficult. In many cases, you’ll need to figure out how to allocate a portion of a larger company cost to your product. For example, if your company spends a certain amount on advertising your company’s entire product portfolio or brand, you will need to include some of that spend as an indirect cost for marketing your product.
If your company spends money on data storage—say, to host your SaaS app in the cloud—you’ll need to determine what percentage of that budget applies to supporting the product you’re analyzing for profitability.
4. Subtract all direct and direct costs from total revenue.
After you’ve tallied up all direct and indirect costs, you can now subtract that number from your product revenue. If what remains is a positive number, congratulations: You have a profitable product.
annual recurring revenue (ARR), turnover rate, customer acquisition cost (CAC), lifetime value (LTV), AARRR pirate metrics framework