Main Takeaway:The Art of Profitability By Adrian Slywotzky
In this show you will learn EVERY node of profitability, and how your business may leverage these profit drivers!
CARE About Profit To succeed in business, you have to have a genuine interest in profitability. And most people dont. To study successful businesses you have to visit their stores, factories, offices - try their products, test their services, spend time at their websites. Most important youve got to talk with their customers, live with them, get to know their needs, wants, problems by spending time with them, seeing what they do, what works forthem & what doesnt. What annoys them & what makes their lives easy or productive or fun. Youll learn more from 1 hour with a customer then 50 research studies.
Innumeracy Lesson You can figure out all the answers with some basic information, calculations, and common sense.• How many people really ask the right questions about a business plan, a new product launch, a major investment, a marketing campaign, an HR program?• Many people in business arent used to thinking this way. You can usually work out less than 7 calculations that will blow up an impressive but fatally-flawed business plan.• Being able to take measure of the world is one of the most crucial skills we can develop. Always do the arithmetic. Its the strongest ally, truth detector, opportunity detector. 4 levels to learning : awareness, awkwardness, application, assimilation. Always ask "why?" 5 times. By the 5th time youll start getting close to the real answer.
Customer Solution Profit Study customers, create a custom solution set with multiple services. Develop the relationship. Invest time and energy in learning all there is to know about your customers. Then use that knowledge to create specific solutions for them. Lose money for a short time. Make money for a long time. Potential applications: Anything, except wherethere is no relationship-building. Where does it NOT work?
Example: Factset Once Factset identified a company as a potential customer, theyd send a team of 2-3 people to work there for a few months, learning everything they could about the customer, how their systems worked (& didnt work), what they really cared about. Based on this genuine knowledge, theyd develop customized products and services tailored to the specific characteristics and economics of the account. Once they landed the account, they spent a ton of time integratingtheir product into the customers systems. During this process, revenues were tiny and costs were huge. But after 3-4 months, they were woven into the daily flow of customers operations. Software debugged and working fine. Now one person could maintain account, part-time. More people in company use it. Costs fall, revenues grow.
Pyramid ProfitCompany caters to different levels of price sensitivity. Offer a range of services from low price / high volume to higher price and lower volume.The base of the pyramid consists of low-priced high-volume products, while the apex is made up of high-priced low-volume products. Thebulk of profitability is concentrated at the top of the product pyramid,but the base plays a strategic role -- often through a "firewall" brand -- in protecting the profitability at the top.At Mattel: Barbie = $20-$30. But imitators can come in below you, soyou build a firewall, a $10 Barbie. Barely profitable but prevents other companies from establishing a connection with your customers. And even girls who start with the $10 Barbie move on to buy accessories. Then made a $100-$200 Barbie for nostalgic collectors.
Pyramid Profit Cont. Has to be more than just a collection of products at different price points. A true pyramid is a system in which the lower-priced products are manufactured and sold with so much efficiency that its virtually impossible for a competitor to steal market share by underpricing you. A firewall. The customers themselves form a hierarchy, withdifferent expectations and attitudes towards price. The pyramid is made to capture them all.
Multi-Component Profit Same product, several businesses. Offer a range of servicesthat includes higher margin specialty items and loss leading,high demand services. Caters to customers that consolidate on fewer suppliers. Multiple products and/or sales channels, and only some ofthese represent the bulk of profitability. To maximize sales inthe high-profitability components, its necessary to have full presence in the less-profitable components as well. Different parts of a business can have wildly different profitability. The customer behaves very differently on different purchase occasions. Different degrees of price sensitivity.
Example: Multi Component Coke per ounce: .02 in grocery store, .06 in vending machine, .12 in restaurantHotel: single room for 1 night, one-day meeting for 20 people, three-day convention for 3000 people.Bookstore: foot-traffic component, ecommercecomponent, book-club component, corporate- purchasing component.
Switchboard Profit Multiple sellers communicating with multiple buyers via apower broker associated with the service provider. The more buyers and sellers that join the switchboard, the larger the margin commanded by the service provider. Cant do it with a small niche: once you have 15-20% of market, an upward spiral kicks in. Perceived probabilities go way up, and all deals start flowing your direction.More profitable because agents cut of so many players in onedeal. Also, by representing a team rather than individual, far better bargaining power. Examples: EBAY, Wilson & Sonsini (Silicon Valley startups), Michael Ovits (Hollywood deals)
Time Profit Takes advantage of innovation, newness, uniqueness, to gain time limited competitive advantage. Requires strong early sales effort to maximize high margin revenue. Profit margins quickly erode as competition catches-up. Needs instant diffusion: a faster way to squeeze out the juice before everyone else learns the secret. What separates winners and losers in innovation is who masters thedrudgery. The creative process usually starts with a brilliant idea. Nextyou determine whether, if the brilliant idea worked, it would be worth doing from a business standpoint. Thats exhilarating and most stimulating part, but its also the easiest. Then comes the real work: reducing the idea to practice. Thats the drudgery part, and the partwhere people need the most pressure and encouragement. People go into pits as they try to turn that idea into products that can be manufactured. Examples: Intel (CPUs), Apple (iPod)
Blockbuster Profit Similar to Time Profit with Revenue realized is so powerfuland fast that in a quick swoop the model pays for often high service development and marketing costs. Big winners get tremendous amount of workover, discussion, debate, attention. Get everyone focused on new key questions: How can we increase the feasibility level of the big projects? Can weparallel-process? can we get more studies done to improvetheir positioning? What will it take to hit a home run? Geteveryone developing it as excited as possible. Go into totalrisk-management mode to remove as much uncertainty as possible. Examples: Movie Studios, Book Publishers, Drug Makers
Profit-Multiplier Model Taking one skill and making money from it 5 or 6 times. Take any asset, iterate it, reuse it, give it a different form.Better profit from lower development cost. Dont have to reinvent the wheel every time you use it.Improves the odds of success for the development youvealready done. Leverage brand to multiply the value of one service by selling loosely related services under the same branding. Example: Disney sells one service (movies) and then leverages brand to sell toys, clothing, dvds, theme park attractions, etc.
Entrepreneurial Profit Totally aligns an organization behind rational, common sense, profit- seeking activity, rather than all the extraneous nonsense that onlylarge organizations can afford or tolerate. A simple mindset that says, "We cant afford to operate any other way.” Creativity and new ideas for better ways of doing things. Delays expenses. Asks hard and well-informed questions about everyexpense. Copies shamelessly from competitors. Holds contests among employees to test frontiers of great performance. Throws parties to celebrate star performers. Experiments a lot. When it fails, he cuts back quickly. When it works, he pours it on. Some employees cant handle the pressure. The ones who stay areexcited and engaged. Hierarchical design with multiple subsidiaries tomaintain startup-like customer responsiveness, energy and efficiency.
Specialist Profit Specialists are several times more profitable than the generalist. Characterized by lower cost, higher quality, stronger reputation, shorter selling cycles, and better price realization.Lower cost through better knowledge. Better price through reputation or unique design of offering. Shorter selling cycle. More rapid &universal penetration because of wired effect. Windfall profits because of high-value high-margin answers throughout the marketplace.The difference in profitability between generalist and specialist will be10-15 points of margin. When generalists break even, specialists make 15%. When generalists make 10%, specialists make 25%. Example: Southwest (one jet type)
Installed Base Profit Initial product sales or profits are slim and profit is realized on follow-up products and services. Two buckets: (1) hardware. 2-5% profit. new demand. bigger price sensitivity. customer has power. (2) consumables. 10-15% profit. continuing demand. less price sensitivity. seller has power.Seller can fuck up by making price too high so customer switches brands. Or if sellers doesnt work to make it easy for customer to buy: early notice, reminders, multiple units per follow-up sale, turning passive receipt into stimulating usage and growth. Take some aspect of your business where customers are returning naturally and stimulate it more - market aggressively. Examples: All suppliers of laser printers and video game players.
De Facto Standard Profit The more players who buy that enter in the system, the more valuable the network.Being the standards gets you plannability - lesssurprise. (Surprises cost money by causing you to react, respond, scramble.) Your customers do your marketing for you. Examples: Microsoft, Apache, SAP, and eBay
Brand Profit The company expends significant marketing investment in order to build awareness and is reinforced by customer experience. You knowBrand is working when a consumer says, "I only drink Coke" even-though blind tests show consumers are often unable to distinguish the difference between Coke and its competitors.Examples: Coke, Crest, Singapore Airlines, Acura
Specialty Product ProfitSimilar to brand profit but companies use above standard materials and design to generate higher margins until competitors start to imitate.Lots of little unique patented products with huge margins. 10 years ago, 80% of profits came from those. Now 80% of profits are fromcommodity stuff. The profit model shifted from specialty product tocost-and-cycle management. Key is to develop new niche products. Difference from Blockbuster is that this is niche: specialty foods, specialty papers, etc. Finding a legitimate need or variation and addressing it. Examples: Apple (computers), Ben and Jerry’s (ice cream), Prada (shoes), Tumi (bags)
Local Leadership ProfitMany businesses and their company economies are totally local. Risk occurs when these companies fail to recognize they are a local business model.Purchasing costs are lower, capture most bettertraffic locations, recruiting and advertising work better. Every store is like a billboard. Slightly higher pricing. Fill a county. Examples: Walmart, Starbucks
Transaction Scale Profit Real estate woman who only sells $1M+ houses. Paid attention only to that market. What kind of people. Studied for 7 years. You get to the big transactions through great relationships. But you cant get to the big transactions just by wanting to:you have to take risks to bias yourself toward the big business.Turn small business away to concentrate on the big accounts. Needs skill, persistence, reference development. Revenue increases proportionately with transaction volume but materials, construction, and or distribution costs do not. Examples: Microsoft (Office software), Morgan Stanley (finance deals)
Value Chain Position Profit "He who occupies the mountain pass can easily battle a thousand." Whatstrue in geography is true in business. There are places in the value chain that are 10 times more valuable than others in terms of profit, power, control. When earthquakes or floods happen, the location of these special places changes, making some vulnerable and others blessed. Note pre-existing control points. (There are none: theyre conditionaldepending on the circumstances: relative value added, trajectory. MS + Intel vs PC makers. Wal-Mart vs suppliers. Creation of scarcity. Capturingbottleneck. Connection to the customer: a better connection than the othervalue-chain players have. Profit from predictability. The company that owns the control point sets the pace. Its business plan defines the future. The others react, always a step behind.) Example: Cingular (partners with Motorola, Sony, insurer to sell Walkman mobile phone)
Cycle Profit Industries characterized by distinct and powerfulcycle. The company can not control the cycle, but it works to maximize its position within the cycles grip. As capacity tightens the companies lead priceincreases, as capacity loosens, its lag price declines. Drive down the breakeven point. Reduce fixed costs. When others lose money, they break even. When others break even, they profit. Permanently ahead. Example: Travel industry (adjust rates seasonally)
After-Sale Profit Price sensitivity changes for different purchase occasions. Lowsensitivity on coffee is what made Starbucks ($2-$3 for a 10-cent cup). For a TV its high: people price-shop relentlessly. Airfare and cars: the highest. Price sensitivity is lowest when ticket price is low and there are few options. The action starts with the high-visibility big-ticket sale. Computers, cars, equipment. Buyers go to the wall to get the lowest price. Their zeal drives the profit out.But the initial transaction creates a new situation: a need for follow-up stuff that did not exist before. You didnt need the service contract before you bought the elevator, PC, pickup truck. Didnt need thereplacement parts or accessories. A whole new minimarket created bythe initial sale. Ticket prices are tiny. Frequency of purchase is greater.
After-Sale ProfitBig-ticket companies should customize the after-sale stuff to the original sale product, so the customer has a compelling reason to buy the after-sale items and services from them. Work hard to turn the after-sale profit model into the installed base profit model. But selling this after-sale stuff is so unglamorous thatmany less are shooting for it : you can quietly sell servicecontracts and insurance for a lot of profit. Needs a very different organization focused only on that.Example: General Electric (nuclear power plant services, auto loans, insurance)
New Product Profit Profit explosion happens at the beginning, during the gold-rush days. Margins are fat and volume is skyrocketing. Multiply these two and you get a growing ocean of profitability. The Profit Parabola _/_ "The total profit earned by all players in a market goes up, peaks, and comes back down to zero." Theory supported by: radios, tvs, vcrs, walkmans, desktops, laptops,servers, sedans, minivans, suvs, faxes, fax-printers, fax-printer-copiers.Time Profit: 2-year cycle, speed, race car, "when you see #2 in the rear- view mirror, step on the gas". Chips, electronics. New Profit Product: 4-year cycle, shift resources, surfing, "get off the last wave first, get on the new wave first". Cars, copiers. Specialty Product Profit: 10-year cycle, select, seismography, "find therichest fields: the place where customer need, technical feasibility, and lack of competition intersect"
Relative Market Share ProfitCompanies with high market share tend to be more profitable. Largecompanies have price advantages due to manufacturing experiences and volume economies from better supplier relationships. Invest towin. Build a bigger lead. If you try and fail, cut your losses or get out completely. (Jack Welch was its most thoughtful practitioner.) Economics of scale. Purchasing advantage. Marketing & advertising.Because lowest overhead per-unit, spread costs over greater volumes than any other competitor. Attract the best talent in the industry. Biggest cash flow, so can outspend rivals. Leader has least volatility, lowest risk. Controlled initiative while others react.Used to think profit was just Relative Market Share, but its function of many things: time, location, offering, local Relative Market Share.
Experience Curve Profit Experience in serving the market and strong financial management drives down the transactional cost. (Basically just continuing to optimize…) Danger is focusing on this too much and losing peripheralvision. (Focus + Peripheral Vision = 100%. The less you have of one, the more you have of the other.) At the edge of the radar screen is where new things come to make you irrelevant, or the invention of a new model thatdelivers the same thing at a 20-30% lower cost, like Southwest Airlines, Dell Computer, Nucor steel, Wal-Mart, Geico, Home Depot. Incumbents are busy managing costs, and someone comes along to introduce the next system. See next point...
Low-Cost Business Design ProfitThe company thrives on reducing the cost per unit through cumulative experience. You might need two organizations: the experience-curve incumbent and the blank-sheet-of-paper gang. Maximizing your current hand while simultaneously buying a big insurance policy on the future. The low-cost business design doesnt need huge market share to be hugely profitable. It is hugely profitable as long as it continues to be dramatically lower-cost.Value Migration: how you have to change your business design every 5 years. (Though it takes 2-3 years to change!) So you need to see itcoming, start preparing for it. Give yourself a 2-year runway to get the new business design off the ground. Start sooner. Move faster. Anticipate.
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