How to Conduct Portfolio Profitability Analysis (Part 1: Customer / Account)
Take hold of your profitability levers before top-down layoffs take a hold of you
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For the last couple years, it seems like the same old question has been asked:
“How do we stop making layoffs and stop experiencing negative start-up sentiment on ‘survivability’ in both public and private markets?”
There are many factors that contribute to failure and generally the financial viability of many start-ups, varying in reason and life stage. According to Failory, the general consensus is that it is caused by general lack of product-market fit, marketing, and team and financial problems.
We’ve seen this story before:
Start-up finds traction in its MVP within a selected market
Start-up raises capital, whether or early or late stage, based on the promise of meeting high growth targets
It aggressively hires with a ‘growth at no cost’ mindset, due to previously cheap cash (the ZIRP phenomena: Zero Interest Rate Policy) often provided in bulk by investors looking for a high return multiple
It scales up its teams, invests into their go-to-market strategy and product only to find that customers are harder to acquire and retain per the forecasts that justified previous valuation and investment
Unit economics become loss-making, eating into the cash raised, but cash is running out and new rounds are not possible at the same low-level interest rates
Companies must make the difficult decision to cut costs drastically across the board, reducing overheads to ensure ‘break-even’ comes faster, and that it generally makes more money than it burns.
Well, at least I’ve been part of one growth story that followed the above (you can probably guess which one!).
How can we prevent such a loop from happening? In my view, as leaders, you need to take control of your own profitability levers, review your product portfolio’s profitability, often through customer segmentation or product line performance analysis, to then make difficult (yet data-driven) decisions on where to cut back or invest further.
In my post below, I provide you a framework for Product Portfolio Profitability Analysis that you can apply to your own portfolio, to steady your own ship, before its too late.
Note: these examples are based on my experience working largely in B2B organisations with at least a handful of distinct features or products, as well as paying customer accounts, where segmentation can be performed across multiple variables.
Preamble: Why review your portfolio, even if your company has already conducted layoffs?
You’re probably already in a company or position where you have seen layoffs conducted in the last two years.
As I reported in a previous article, and according to layoffs.fyi, we’ve already seen 1155 tech companies that have laid off at least 250,000 employees in 2023 alone (as of 12th December 2023). Another source (TrueUp) believes that this number can be as high as 450,000.
Just because your company has already done one or more round of layoffs, it can always still make layoffs, even for a growing company that has had profitability or has been close to it.
For example, according to Wall Street Journal, on December 11th 2023, Spotify laid off 17% of its workforce, despite making 11% more revenue in Q3 (close to $3.6 billion). Over the last 12 months, stock has been up 130%, rewarding cost cutting measures. Simply put, this is what investors want: return on cash invested.
So, take the helm of your own product stack as much as you can: analyse your own portfolio of products and make the hard decisions now, so you can divert your resources towards higher growing or more profitable products and services.
In this strategy deep dive, we present to you two parts:
Customer / Account Segmentation ← this post
Product-Line Profitability Analysis (next post)
Let’s begin!
What is Customer and Account Segmentation?
Segmentation is the process of identifying distinct and actionable groups of customers based on various measures, such as revenue generated, cost to serve, perceived value, characteristics, behaviours, needs, or attitudes towards the product.
The purpose of customer segmentation is to effectively quantify and communicate the value of products, not only influencing how your commercial stakeholders manage their go-to-market and sales strategies, but also to ensure a reasonable amount is invested into the more favourable customer segments.
Bottom line: properly created segments allow the business to focus its efforts and offerings on the most attractive groups of customers.
Segmentation forms the basis for creating and tailoring value propositions that align with the customers’ needs.
4 Steps to B2B Customer / Account Portfolio Segmentation
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