The things that cost you too much - a story about a song

28 March 2014

Steve Mainprize

Steve Mainprize

Consultant

This is a story about a song. Later on, it will become a story about product profitability, but all in good time.

In 1982, the band New Order bought themselves a new drum machine.  Almost as an exercise to teach themselves how to use it, they built a track called Blue Monday, which, although it stole extensively (from Donna Summer, Kraftwerk and Ennio Morricone, amongst others), ended up as something that felt very, very new indeed, and is often seen as the precursor to the dance / rock hybrids and house music of the late 1980’s.

Back in those days, being different wasn’t the shortest path to commercial failure, and Blue Monday went on to break records. Not only was it one of the longest tracks to make the British charts, it also became the biggest selling 12-inch single of all time.

Under normal circumstances, this would have been great news for the band and guaranteed financial success for its record company.  But New Order’s record company was the legendary Factory Records, an organisation which had little time for concepts such as ‘normal circumstances’ and ‘financial success’.  On the other hand it was extremely fond of self-mythologising, grand gestures, and high-concept packaging.

Factory’s in-house design guru was Peter Saville, who has since worked for Selfridges, EMI and Manchester City Council, and also designed the 2010 version of the England football team’s home kit. But he remains best known for his designs for Factory, and the sleeve for Blue Monday is arguably his best known effort. 

The Blue Monday sleeve is, in fact, the heart of this story.

In those days, if you wanted to save the program that you’d written for your new drum machine, you used a magnetic storage medium called a floppy disk. Made of a circular piece of mylar, the disk itself is housed in a PVC jacket which protects the disk, but has holes to allow the disk drive to rotate the disk in its sleeve and allows the drive’s read/write head to contact the disk.

When Saville was asked to produce the packaging for Blue Monday, he was inspired by the form factor of the floppy disk. The record was released as a 12-inch disc in a silver inner sleeve, within a die-cut colour sleeve cut to resemble the holes in the floppy disk’s sleeve.

Now, relatively low volume, custom die-cut colour printing is about as expensive as it gets for manufacturing record sleeves. Factory may have had a reputation for playing fast and loose with cost management, but of course they had to outsource the printing to a proper business, who presumably had a better grip on their costs than the record company, and charged Factory accordingly.

The legend says that Factory subsequently lost money on every copy sold, although how much they reportedly lost seems to depend on who you ask, probably partly due to self-mythologising and partly down to laissez-faire cost control.

But here’s the thing with product profitability: once you’ve identified a product as unprofitable, you have a choice what you do about it. One option is to stop making it. This is the simple option, and if you do this, at least you stop paying good money for the privilege of having your customers take your products away.

But there are other options. For example, you might be aware that, even though your product is currently losing money, you’ve created a demand for it, and it would be a pity not to take advantage of it. This is what Factory did with Blue Monday. Although the first pressings of Blue Monday were released in the costly packaging, later copies came in more conventional sleeves, first without the die-cuts and then with a grey inner sleeve instead of the silver.  My own copy has this cheaper packaging, and apparently the early pressings sold out so quickly that Peter Saville’s own copy does, too.

I often work with clients to analyse their product profitability. SAP Profitability and Cost Management is a particularly useful application for doing this, as it explicitly models the causal relationship between your organisation’s outputs – for instance, its products – and the activities that the organisation carries out to deliver those outputs. One useful representation of this modelling is the whaleback curve, shown below.

 


 

The whaleback curve shows all products on the horizontal axis, ranked according to decreasing profitability. The line indicates cumulative profitability. When you get to the peak of the curve, indicated by the dotted line, everything to the left of that point is profitable, and everything to the right is unprofitable.

It’s all very well knowing this information: the important thing for your business is to act on it. So, what can we do about those products to the right of the dotted line?

Maybe you could just put the price up. This might work in some situations, but also might result in lower sales volume. You could abandon the product entirely, but don’t want to sacrifice all the work you’ve already done in launching the product, creating demand, and so on.  So what other options do you have? As long as you’re armed with the right information, you have several, including:

  • Improve the process. Look at how the unprofitable products are consuming your activities, compared to the profitable ones. Is there a production quality problem that requires frequent rework?
  • Change the product. This is what Factory effectively did with Blue Monday. They figured out where they were carrying cost that could be reduced without materially affecting the value of the product to the record buying public, and implemented it. Almost like a proper business
  • Investigate the customer dimension. Your products are likely to show different profitability for different customers because, just like products, each customer consumes your activities in a different way. Maybe a particular customer makes multiple small orders every month, and hence drags down the profitability of their favourite products. If you know this, and can quantify it, you can talk to the customer and maybe work out a way to change their ordering pattern to benefit both parties
  • Investigate the channel dimension. The ordering process for a product is likely to be very different from channel to channel. For instance, an internet sale ought to be less costly to you than a sale on the High Street. If it isn’t, why not? Is there a sticking point in the online process that’s causing costs to go up, or volume to be lost?

You might point out that, in the case of Blue Monday, the breakdown of costs that went into the product were pretty obvious, and the solution to the problem was obvious too. You’d be right.  But in a lot of organisations, particularly where products are complex and incur costs from across the business, it’s not that obvious what’s contributing – unless you carry out a detailed cost analysis.

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