Ask a management team which of their customers make them money and you will usually get a confident answer. Ask them to show it, customer by customer and product by product, and the confidence tends to fade. Conventional accounting was built to satisfy external reporting rules, not to tell you where profit is created. Overhead gets spread across everything in proportions that reflect convention rather than reality, and the result is a picture that looks precise but often points the wrong way.
What true profitability means
True profitability is pure profit, stripped of the arbitrary allocations and interpretations that conventional accounting systems create. It starts with the contribution margin and ends with the free cash generated by each combination of products and customers. Said simply, it is money in the pocket.
Contribution margin is the right place to start because it is a clean ratio between two things that are real. Price is set by the market. Direct cost is achieved through the company's own capabilities and skills. That makes it the purest indicator of economic performance we can find in a business. Everything else is abstraction and convention.
Masters of complexity
Patrick Mosimann and I spent a long time studying companies that carry enormous product ranges, sometimes in the millions of items, and still make excellent returns. We called them masters of complexity. They use the long tail of variety to attract new customers and grow, yet they avoid the chaos that variety usually brings.
What separates them is that they can tell useful complexity from harmful complexity, and they measure both. True profitability guides them to rationalize portfolios, standardize processes and products, and build modularity into vast offerings. They treat the data generated by their operations as being as important as the products themselves.
Most companies that suffer from complexity did it to themselves, through growth at any cost: botched acquisitions, products that never earned their keep, customers who cost more to serve than they paid, and a quiet belief that all business is good business. The cure starts with seeing clearly. Once you can see true profitability, the decisions that follow are usually obvious, even if they are not easy.