The general assumption in business is that a product failing to achieve financial targets should be retired quickly to reallocate resources. This straightforward approach often overlooks the strategic, operational, and financial considerations within a larger corporate portfolio. A product’s true value is not always reflected in its standalone profit and loss statement, leading brands to maintain offerings that appear to be underperforming. These products often serve a deeper purpose that supports the overall health and competitive position of the business.
Strategic Defense and Maintaining Market Presence
Some products are retained primarily for defensive reasons, acting as placeholders to prevent a competitor from gaining a strategic foothold. Removing an underperforming item creates a void that a rival could immediately exploit to gain distribution, shelf space, or market segment experience. Maintaining a full product line effectively blocks a rival’s entry point, forcing them to spend more capital and time to develop their presence. This tactic, known as “flank defense,” shores up weaker product lines to protect the company’s overall dominance.
A complete offering is often necessary to secure retailer cooperation, especially where major chains allocate shelf space based on the breadth of a brand’s catalog. By keeping a less popular variation, a brand can justify controlling a larger block of retail space, which benefits its high-volume, profitable products. This ensures the brand remains the default choice for consumers seeking variety, limiting the available real estate for new entrants or smaller competitors. The cost of maintaining the low-selling product is viewed as a necessary expenditure for securing broader market access and competitive insulation.
Covering Operational Fixed Costs
A product may generate a net loss when a full accounting model allocates a portion of fixed overhead expenses to it. However, the decision to keep the product is financially sound if its revenue exceeds its variable costs—the expenses directly tied to producing one more unit, such as raw materials and direct labor. The difference between the product’s revenue and its variable costs is its contribution margin.
If this contribution margin is positive, the product actively helps cover the business’s operational fixed costs, such as factory rent, salaried management, or utility bills. These fixed costs persist whether the product is manufactured or not. Eliminating a product that contributes positively to overhead would leave the remaining fixed costs to be absorbed entirely by profitable products, potentially diminishing the profitability of the entire enterprise. Therefore, an item technically losing money on paper is financially beneficial as long as it contributes toward covering the unavoidable fixed expenses.
Functioning as a Loss Leader or Gateway Product
The purpose of a loss leader product is not to generate direct profit but to stimulate sales of a more lucrative complementary item or service. This strategy accepts a loss or minimal margin on the primary product to drive high-volume, high-margin sales elsewhere. A classic example is the razor and blade model, where the razor handle is sold at a low price, sometimes below cost, to lock the customer into purchasing proprietary, high-margin replacement blades over many years.
Technology and consumer goods companies use this model extensively, such as selling a printer at a modest price to ensure a steady stream of revenue from expensive ink cartridges. Another application is the sale of coffee machines, which are often priced attractively low, with long-term profit coming from the recurring purchase of dedicated coffee pods. These gateway products are effective at attracting new customers and creating a revenue stream based on consumable goods or subscription services, justifying the initial product’s poor performance.
Maintaining Brand Equity and Portfolio Completeness
Certain products, even with low sales volume, reinforce the brand’s image and promise to the consumer. These “halo products” cast a favorable light on the brand’s entire portfolio due to their prestige and positive perception. For instance, a luxury car manufacturer may maintain a low-volume, high-performance model that showcases engineering prowess, even if it is not a top seller. The existence of this aspirational item validates the brand’s premium image, influencing customers to buy the higher-volume, more profitable models.
In retail, maintaining a full product line satisfies customer expectations of variety and completeness. A food company may continue to produce a less popular flavor to ensure its retail display looks comprehensive, fulfilling the perceived brand promise of offering a complete range. This focus on perceived completeness strengthens customer loyalty and trust, which are intangible assets difficult to quantify on a single product’s balance sheet. The perceived lack of variety caused by discontinuing a product can sometimes be more detrimental to overall brand equity than the minor loss incurred by keeping it.
Utilizing Products as Testing Grounds for Innovation
Underperforming products can be strategically maintained to serve as real-world testing platforms for new technologies, manufacturing processes, or supply chain innovations. The product’s primary function is not to generate profit but to mitigate the risk associated with rolling out untested changes to the brand’s flagship products. These experimental lines function as applied research and development, allowing engineers and operations teams to gather data on durability, material performance, or production scalability.
This investment in learning justifies the product’s continued existence, as the knowledge gained is transferred to the high-volume, profitable items. For example, a new polymer or sustainable material might first be introduced in a niche accessory to gauge consumer reaction and manufacturing feasibility before integration into a core product line. The losses incurred by the test product are accounted for as an investment in future innovation, accelerating the development cycle for the entire portfolio.
High Exit Costs and Contractual Obligations
The financial and legal barriers to discontinuing a product can sometimes exceed the cost of simply keeping it operational. These “barriers to exit” include substantial financial penalties for breaking long-term supplier or raw material contracts. If the brand is locked into a fixed-term lease for specialized production machinery or a dedicated facility, the cost of paying out the remaining lease can be prohibitive.
The brand must also account for personnel costs, which may include severance packages for dedicated production staff who cannot be easily reassigned. The disposal of highly specialized assets or machinery with low resale value can also result in significant write-offs and closure costs. When the immediate, lump-sum expense of exiting the market outweighs the projected ongoing losses of maintaining the product, the financially prudent decision is often to keep the product running until contracts naturally expire or assets can be slowly phased out.
Determining When to Finally Cut Losses
The rationale for maintaining an underperforming product is only valid as long as its strategic purpose remains clear and measurable. Brands must regularly review these products using a framework that looks beyond the standard profit and loss statement, assessing whether the item continues to fulfill its non-financial mandate. This review involves asking specific questions: Is the product still contributing a positive margin to fixed overhead, or have variable costs risen so high that the contribution has turned negative? Has a competitor successfully found a workaround for the strategic defense, rendering the product obsolete?
The danger lies in allowing a product to become a “zombie product,” one that has outlived its strategic utility but is kept alive due to inertia or the avoidance of exit costs. If the product is no longer an effective loss leader, no longer reinforces brand equity, and has ceased to be a valuable testing platform, its continued existence drains resources without providing a corresponding benefit. A strategic review must ultimately determine the point at which the product’s drag on resources, management attention, and overall efficiency exceeds the diminishing value of its strategic function.