What is a Product Hierarchy and How Can It Boost Gross Profit?
Leveraging a product hierarchy to manage gross margin performance is a powerful way to enhance both margins and revenue. While often underutilized in mid-size businesses, product hierarchies are accessible in most ERP systems—even in QuickBooks. Whether you’re using SAP or QuickBooks, there’s no reason not to develop this valuable tool.
A product hierarchy is a method of grouping products. The levels available may vary depending on your ERP system, but a 4-level hierarchy might look like this:
Product Line
Product Segment
Product Family
Product Type
The specific names for each level aren’t crucial—they should be defined by Marketing if they don’t already exist. At the lowest level (Product Type in this example), product IDs grouped in a single Type would have similar uses and prices. These Types roll up into Families, and so on. Here are three simple ways to use this tool:
- Identify Pricing Opportunities: Review products within a Type for inconsistencies across customers, sales reps, and regions. This analysis can uncover opportunities for price increases.
- Maximize Customer Potential: Analyze customer purchasing habits through the hierarchy to spot where customers aren’t buying certain products. Most systems allow Customer Service to set up discounts by hierarchy, providing Sales with a strategic way to introduce these items on a discounted basis.
- Optimize Inventory: Evaluate Product Segments using metrics like Gross Margin Return on Inventory (GMROI) to make informed product rationalization decisions.
There are countless other ways to leverage a product hierarchy that can be tapped by creative Marketing and Sales teams. If you don’t have one, set it up today. Need help setting up BI systems to exploit your product hierarchy? Let’s connect!
Chase Morrison
Feel free to reach out with questions or if you need assistance! If you’d like to improve your gross margin analysis capabilities, click this link.
