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At KAAS we know many Irish SMEs assume that their best-selling product or service is also their most profitable. It feels logical. If something sells well, it must be driving the business forward. In reality, volume and profit are not the same thing, and confusing the two can quietly undermine financial performance.

The key issue is margin. Profitability is determined not by how much you sell, but by what remains after all costs are accounted for. A product may generate strong revenue, yet deliver a low margin once production, delivery and support costs are included. Over time, high-volume, low-margin sales can dominate activity while contributing less than expected to overall profit.

Pricing is often at the centre of this problem. Best-selling products are frequently priced competitively to attract demand. Discounts, promotions or legacy pricing structures may further reduce margins. While these strategies can increase sales, they do not always improve profitability.

Costs are another factor. Direct costs such as materials, labour and logistics may be higher than assumed. In some cases, these costs increase over time without a corresponding adjustment in price. This leads to gradual margin erosion.

There are also hidden costs that are not always considered. Customer support, returns, administration and time spent managing orders all contribute to the true cost of delivering a product. High-volume items often require more attention in these areas, increasing the effective cost of sale.

Customer behaviour can reinforce the issue. Popular products may attract price-sensitive buyers who are less loyal and more demanding. This can increase service requirements while limiting the ability to raise prices.

In contrast, less prominent products or services may deliver stronger margins. These may require more expertise, involve less competition or provide greater perceived value to customers. While they may not generate the same volume, they can contribute more effectively to profit.

A common challenge is visibility. Many SMEs track sales performance but do not analyse profitability at a detailed level. Without this insight, it is difficult to identify which products are truly driving financial results.

Improving this requires a more granular approach. Businesses should assess profitability by product or service, taking into account all relevant costs. This provides a clearer picture of where value is being created.

Pricing strategy should also be reviewed. Prices should reflect both cost and value. Where margins are too low, adjustments may be necessary. This may involve increasing prices, reducing costs or repositioning the product.

It is also important to consider product mix. Focusing solely on high-volume items can limit profitability. Balancing volume with margin allows for a more sustainable approach.

Efficiency improvements can also support better outcomes. Streamlining production or delivery processes reduces cost and improves margin without affecting price.

The key insight is that popularity does not guarantee profitability. A product that drives activity may not drive profit.

Irish SMEs that understand the difference between volume and margin are better positioned to make informed decisions. By focusing on profitability rather than sales alone, they can ensure that growth translates into stronger financial performance.

Disclaimer: This article is based on publicly available information and is intended for general guidance only. While every effort has been made to ensure accuracy at the time of publication, details may change and errors may occur. This content does not constitute financial, legal or professional advice. Readers should seek appropriate professional guidance before making decisions. Neither the publisher nor the authors accept liability for any loss arising from reliance on this material.

 

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