The Art Of Profitability: A Look At Twenty Three Profit Models

The Art Of Profitability: A Look At Twenty Three Profit Models by Adrian Slywotzky via LeeGale.com

Questions to ask whilst thinking about these profit models:

• Which of these models are at work in my company?
• How does profit happen in competitors businesses?
• What can I do in the next 90 days to intensify my organizations focus on profitability?
• What profit model would enable us to maximize profits this year?

23 Profit Models

1 – Customer Solution Profit

• How could a company of 36 people generate $24M in revenue, compared to 400 people generating $40M in revenue?
• They identified the customer they needed, sent 2 people to work there for 2-3 months, and learned everything about the customers business. Then they sold their product to the customer, fully integrating it into their business.
• This principle is basically universally applicable.

2 – Pyramid Profit

• Multi-tier product strategy that encompassed a core product, a standardized (but high quality and efficiently produced) product as a low-end “competitive firewall” to block new entrants from the market, through to a “rolls-royce” product.
• Each should appeal to a specific niche and requires a specific understanding of all customer, both current and potential.
• Examples include Nokia phones, AMEX’s credit cards and GM cars.
• An example of poor execution would be petroleum and the flat pyramid relationships caused by a focus on price competition, as opposed to functionality.

3 – Multi-Component Model

• This model applies where a single product is applied at a different price to different channels.
• The best example is Coke Cola. You buy the same product at different prices (according to price sensitivity at each) at a vending machine, a supermarket or a restaurant.
• Customers usually are consistent to all channels rather than just one. The situation (ie where they are and what they are doing) is what specifies the channel.

4 – Switchboard Profit

• The bringing together of sellers, with buyers to create a monopoly on high-value sales.

5 – Time Profit

• Upfront innovation yielding large profits that are eroded over time by competitors entering the market created.
• The key to building large profits is to master the art of innovation so efficiently, that you maximize the profits upfront.

6 – Blockbuster Profit

• Applicable to managing a product pipeline.
• Differentiation of high-profit R&D vs anti-profit RD i.e. a market where customers won’t pay for what you develop.

7 – Profit Multiplier Model

• The use of a multiplier effect to more than merely double profits.
• A good example is Honda’s manufacturing car engines, outboard motors, industrial engines and more. Basically using a base skill of motor engineering to create products across different markets.
• Forms of realization include skills, assets and Intellectual Property.
• Different products that realize a Blockbuster Business Operating Model to increase the odds of success.

8 – Entrepreneurial Profit

• Fundamental tenants: copy your competitors, celebrate star performers, save money, experiment, cut loses quickly, focus on wins and have fun.

9 – Specialist Profit

• Really learning vs just learning a topic.
• EDS did not learn everything at once. It chose a segment and learned it exquisitely well. They learned all the processes of an industry so well, not just in general, but specifically for each player.
• This can lead to a reputation for experience, leading to higher utilization of resources, and high sales volumes and margins per sale.
• Additionally, this model can attract better talent to a business, shorter sales cycles, higher quality outputs and a better ability to up-sell to customers.
• Most of the cost is in developing the solution.

10 – Install Base Profit

• Demand volatility: high vs low
• Price sensitivity: high vs low
• Per unit cost: high vs low
• Consumer control: high vs low
• Sellers can screw this up buy having too high a price on consumables, or marking it too hard for the customer to buy.

11 – De Facto Standard

• Surprises cost money, therefore De Facto Standard allows for plan-ability for customers.
• IBM Mainframes, Microsoft Windows, Oracle DB...

12 – Brand Profit

• A cumulative effect of ad spending.
• We spend what we can afford rather than spending to drive market share.
• This shouldn’t preclude finding more leveraged methods i.e. differentiation, better channels or Share Determining Segments (SDS).
• SDS is where high share today translates to high share of the whole market tomorrow. An example is architects.

13 – Specialty Product Profit

• Specialist products earn higher gross margins.
• This shift for specialist to commodity is something every business needs to do at some point.

14 – Local Leadership Profit

• Generates higher buying power, better traffic, lower recruiting costs, high impact – low cost marketing whilst allowing for premium pricing.
• The effect is regional business fueling growth to neighboring regions.
• This approach requires a consistent and persistent approach.

15 – Transaction Scale Profit

• Big transactions mean bigger profits.
• Big transactions = relationships.

16 – Value Chain Profit

• Some locations in the value chain are more important than others (e.g. Microsoft and Intel)
• The key is identifying the control point and owing it.
• Points change and emerge across industries.

17 – Cycle Profit

• This focuses on volume and not the relationship between cycles and profit.
• The goal is to reduce the costs of production so you are ahead of the industry in break even and profits.

18 – After Sale Profit

• Price sensitivity is highest when ticket price is high, variability is high and there are lots of options. The converse is also true.
• This can create an environment for follow up opportunities.
• Different to install base – in this case, the manufacturer doesn’t benefit from the “follow up” market.
• It takes a different sort of organization to focus on sales after the big ticket sale.

19 – New Product Profit

• Not to be confused with Time or Specialty Product profit models.
• Over invest on the upside and cut back investment on the downside.
• Measure everything that will give you an indication that you are approaching the peak i.e. growth rates, price changes, etc.

20 – Relative Market Share Profit

• Characterised by Jack Welch
• It works via scale in manufacturing combined with the lowest purchasing prices.
• This results in the lowest cost per unit, with the lowest R&D cost per unit.
• In addition, this brings other benefits in that RMS becomes a magnet for talent and also combines multipliers such as Value Chain Profit and De Facto Standard profit models.

21 – Experience Curve Profit

• Was 60% of a 1960’s Business School curriculum – now about 1%.
• Similar to RMS but focuses purely on taking costs out of the system.
• Experience curve is also about learning rates i.e. knowing when to cut costs, what to focus on.
• The danger here is completely managing details and losing vision for where the product life-cycle is going i.e. new paradigm (cans to bottles) or a new system (DELL, Southwest).

22 – Low-Cost Business Design Profit

• Focusing on inflicting value chaos to experience curve or RMS models by undercutting on price (by taking 20-30% of the costs out of the system) or the next system (i.e. cans to pet bottles).

23 – Digital Profit

• Shifting from conventional to digital can have a huge impact on profitability
• A great example is DELL. Others include: CEMEX, Oracle. All delivering more than 10x more profitable models.
• Delivers higher customer control to select (Choice Boards)
• But it can’t redeem a crummy business model !!!

See full PDF below.