What is a profitable product?

Product mix decisions can have a critical impact on both the profitability and competitive position of a firm [7] (Porter, Michael: Competitive Strategies, New York, The Free Press, 1980.). Typically, a product mix decision is made by comparing product profit margins and considering nonquantitative criteria including "carrying a complete line of products" [1, 6] (Boyd, H. W, Jr,, and Walker O. C., Jr.: Marketing Management: A Strategic Approach. Irwin, Homewood, IL, 1990.) (Kotler, P.: Marketing Management: Analysis, Planning, Implementation, and Control. Prentice-Half, Englewood Cliffs, NJ, 1988.). In some situations, however product profit margins may lead to erroneous strategic decisions about product mix [5, 9] (Johnson, H. T., and Kaplan, R.S.: Relevance Lost: The Rise and Fall of Management Accounting. Harvard Business School Press, Cambridge, MA, 1987.) (South, J. B., and Oliver, J. E.: A Value Added Approach to Product Mix Decisions. Industrial Marketing Management 21, 167-171 (1992)). In this article, two terms are introduced and defined. The two terms, marginally profitable and fully profitable, allow the description of four classifications of products so that better product mix decisions can be made. A product may be both marginally and fully profitable, marginally but not fully profitable, neither marginally nor fully profitable, and even fully but not marginally profitable. Advice on how to manage each product in the product portfolio is provided. (C) 1998 Elsevier Science Inc.