W. Kandinsky, Parallel Diagonals, 1925
Investment School
Profit Zones
In considering a company's investment potential, two of the most critical
questions to ask yourself are:
- How does this company make money?
- How can it make more money than that?
These questions seem simplistic, but, in fact, they are deceptively probing.
Threre are more than 20 distinct profit models. Most useful to investors,
these models provide an analytical framework that enables a better
understanding of how certain profit models apply to certain companies, and
what this means for a company's future profit potential.
Models
Customer Solutions Profit
- Think of this as the beyond-the-box model. Companies in this
niche may start by selling a basic product, but their profit zone
is in selling an array of additional products and services -- things
such as financing, consulting, service contracts, and product
disposal -- which, as a whole, fulfill a customer's total solution.
Product Pyramid Profit
- In this profit assortment structure, the base of the pyramid consists
of low-priced, high-volume products, while the apex is made up of
high-priced, low-volume products. The bulk 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.
Multicomponent System Profit
- Businesses in this category have either multiple products
and/or sales channels, and only some of these represent the bulk
of profitability. But, in order to maximize sales in the high-
profitability components, it's necessary to have full presence in
the less-profitable components as well.
Switchboard Profit
- When multiple sellers are communicating with multiple buyers,
an intermediary can capture an extraordinary amount of value by
providing a single communications medium that reduces the costs to
both buyers and sellers.
Time Profit
- This model applies to innovators with a time-limited
competitive advantage. When a product is new, it earns premium
profits. Then, when a competitor copies the innovation, price
competition drives profits to zero. Companies relying on this
model make continuous innovation the modus operandi.
Blockbuster Profit
- The name says it all with this model. Pharmaceutical companies,
publishers, film studios, music companies, and software firms all
earn their big money from a few mega-sale blockbusters. The
economics of this model are such that the costs to produce a big
winner don't differ substantially from the costs to produce a flop
or sub-par performer. In this fixed-cost environment, profitability
is maximized by very high sales volume.
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