Most mid-market companies I work with are proud of their product breadth. The catalog has grown over years of customer requests, competitive responses, and one-off deals that turned into standing SKUs. Leadership talks about it as a strength — the ability to serve a wide range of customers, the flexibility to meet any spec, the willingness to build what the market asks for. Most of the time, it isn’t a strength. It’s a strategy that happened by accident.
When I sit down with a leadership team and put their SKU count next to their revenue distribution, the pattern is almost always the same. Eighty percent of the revenue comes from twenty percent of the products. The other eighty percent of the SKUs are consuming operational bandwidth, sales attention, and working capital for a sliver of the top line. And nobody in the organization is responsible for asking whether that trade-off still makes sense.
Complexity Feels Like Optionality
Product complexity is seductive because it feels like optionality. Every SKU is a door you can walk through, a customer you could serve, a deal you might win. Cutting any of them feels like closing off possibility. That’s why portfolios tend to grow over time and almost never shrink.
But complexity isn’t free. Every SKU carries a cost — not just the obvious ones in inventory and fulfillment, but the less visible ones in sales enablement, training, forecasting, and management attention. A sales rep who has to be fluent in 400 SKUs is going to be expert in about 30 of them. The rest get surface-level treatment, inconsistent pricing, and underperforming sales conversations. The optionality that looks like breadth from the leadership suite looks like dilution from the front line.
What the Tail Actually Costs
The products at the bottom of a portfolio tend to behave similarly across industries. They have low volume. They have inconsistent margins. They require custom handling at some point in the process — a special order, a manual quote, a non-standard lead time. They tie up working capital in slow-moving inventory. And they often generate more operational exceptions per dollar of revenue than the core SKUs do.
When I put this in front of a CFO, the reaction is usually some version of “I had no idea the tail was costing us this much.” That’s because tail costs are rarely captured cleanly. They live in labor hours that don’t get attributed, in inventory carrying costs that blend into the aggregate, in sales time spent on low-yield conversations. The company sees the revenue from each SKU. It doesn’t see the drag.
Which raises an uncomfortable question. If you stripped out the bottom thirty percent of the portfolio, what would actually happen? In most cases, less than leadership assumes. Customers who buy tail SKUs almost always also buy core ones. The exceptions are often addressable. The revenue left behind is often recovered by a core sales team now focused on products it can actually sell well.
What Segmentation Reveals
SKU rationalization isn’t a cost-cutting exercise. It’s a commercial one. The purpose isn’t to simplify operations — that’s a byproduct. The purpose is to focus the commercial engine on where value actually gets created, and that requires segmentation on both sides of the equation.
On the account side, which customers are growth accounts and which are service accounts? Which segments are defining the future of the business, and which are legacy? On the product side, which SKUs are strategic — tied to your differentiation, your target segments, your margin profile — and which are historical? When you overlay those two views, the picture gets clearer quickly. A strategic product in a growth segment is where you invest. A historical product in a legacy segment is where you have a conversation about what it’s still doing in the catalog.
That’s the analysis. It isn’t complicated. What’s hard is the willingness to act on it.
A Commercial Decision, Not an Operational One
I’ve watched SKU rationalization efforts stall because they got routed through operations. Operations can tell you what a SKU costs to produce and ship. They can’t tell you what it costs in sales focus, customer mix, or commercial clarity. Those are commercial questions, and they have to be owned by the commercial leadership that’s accountable for the outcomes.
The companies that get this right treat portfolio rationalization as part of the commercial strategy, not the operational cleanup. They sequence it correctly — segmentation first, strategy second, SKU decisions third. They don’t just cut products. They reallocate the sales time, marketing dollars, and management attention those products were consuming into the parts of the business that earn the investment.
For PE sponsors looking at a portfolio company, a bloated catalog is a signal worth paying attention to. Not because the company sells too much. Because the company hasn’t yet decided what it’s actually trying to sell. That decision, once made, tends to unlock margin, focus, and growth — in that order. And it usually reveals that the business was stronger all along than its own complexity had allowed it to show.