Most businesses assume that a broader product or service portfolio means more revenue opportunities. Add a new SKU, launch a service variant, serve an extra customer segment — and growth follows. But when you look at the actual cost data, a different story emerges. Complexity is expensive. And most companies are paying for it without knowing how much.

Why Complexity Hides Itself So Well

The problem with complexity is that traditional accounting systems don’t reveal it. Standard cost allocation spreads overhead across products using simple volume-based drivers — usually revenue or direct labour hours. This means that high-volume, simple products subsidise low-volume, complex ones. The income statement looks healthy. The product mix looks diversified. And the company keeps adding variants without ever seeing the true cost of doing so.

It’s only when you move to an activity-based approach — mapping actual activities to actual products — that the picture changes. Suddenly, that niche product line requiring custom packaging, special supplier handling, and unique quality checks isn’t contributing margin at all. It’s consuming it.

The Real Costs of a Complex Portfolio

Complexity generates costs across every function of the business. In procurement, more SKUs mean more supplier relationships, more purchase orders, more price negotiations, and more risk of stockouts. In production, variety creates setup times, line changeovers, and shorter runs — all of which destroy efficiency. In logistics, complex portfolios generate more small shipments, more returns processing, and more warehouse locations to manage.

In customer service, complexity means more product-specific queries, more training for frontline staff, and more exceptions in order fulfilment. None of these costs are trivial. And none of them show up clearly when overhead is allocated by revenue share.

The Profitability Visibility Problem

This is fundamentally a profitability visibility problem. Without a proper cost allocation model, management makes product and portfolio decisions in the dark. They see gross margin by product, which ignores most of the complexity cost. They see total overhead as a lump sum, which hides where it actually goes. They launch new variants to grow revenue — and gradually erode profitability across the entire business.

A well-built TDABC model changes this. By tracing time and resource consumption at the activity level, it assigns costs to products, customers, and channels based on what they actually demand from the business. The result is a clear view of which products are genuinely profitable, which are marginal, and which are destroying value.

What the Data Usually Reveals

In most profitability analyses we run, the pattern is consistent: roughly 20 to 30 percent of the product portfolio generates all the profit. Another 50 percent is roughly break-even. And 20 to 30 percent is actively loss-making — but hidden behind average margins that look acceptable.

This doesn’t mean every loss-making product should be cut immediately. Some products anchor customer relationships. Some serve strategic purposes. But the decision to keep them must be explicit — not accidental. And it can only be explicit when you have the cost data to support it.

Simplification as a Profitability Strategy

The most effective profitability levers aren’t always pricing or cost reduction. Often, the highest-impact move is simplification: reducing the number of active SKUs, rationalising customer segments, or standardising service variants. When you eliminate a low-margin product line, you free up capacity. That freed capacity can either be redeployed to high-margin products or reduced to cut costs. Either way, the business becomes more profitable without selling more.

This is a counter-intuitive insight for growth-oriented companies. But complexity has a compounding cost. Every time you add a new variant without retiring an old one, the overhead burden grows a little more. The only way to see this effect — and manage it — is through a rigorous cost model.

Where to Start

You don’t need to build a full TDABC model to start asking the right questions. Begin with your most complex product lines: which ones have the most unique activities? Which require the most exceptions in production, procurement, or service? Which have the lowest volumes relative to the setup cost they generate? These are the candidates most likely to be hiding losses.

If your current reporting can’t answer these questions, that’s the signal. Profitability visibility is not a finance problem — it’s a management problem. And it starts with understanding what complexity really costs.

Take our free Profitability Health Check to see how your business scores on profitability visibility and cost allocation. Or explore how a ProfitAudit 360 engagement can give you a full picture of where your margin is really going.