Of Products and Customers, Cabbages and Kings
Product evaluation criteria can utilize these four categories:
1) Fails to make money under any and all measures
2) Does not cover variable costs, but breaks even when future / downstream / derivative / service / after-market revenues are included
3) Covers its variable costs (which already includes standard direct and indirect costs, since he is assigning all costs via ABC)
4) Covers its variable costs and its associated cost of capital
Once you’ve segmented your products (or customers) by profitabiltiy, one of the basic tenants of activity-based management is to take the necessary actions to move the losers into the break-even column, and shift the break-even products into profitable territory. Yet his history showed that, once introduced, products tend to improve their profitability up to a point, then peak and level off there, no matter what actions R&D, manufacturing or marketing may attempt to propel them to the next level.
Prescription? We need to be better disciplined about terminating the losers.