5 Thought-provoking Profit Models
Your pathway to profitability lies fully in understanding your customer…and yourself.
You may understand physical energy, but do you understand financial energy? It’s very difficult to keep making money, let alone be profitable, if you have boxed yourself into a no-profit model. But as well, know that you can be hugely profitable without being huge.
I have extracted and interpreted the information for this article, from the pages of a wonderful book titled “The Art of Profitability” by Adrian Slywotsky, which I have read (almost) 3 times over the years.
If you have a genuine, honest-to-goodness interest in profitability, you will find some thought-provoking ideas at work here. As you read through my “interpretation” of these profit models, think about these points:
· Which of these profit models do you currently use? What is their effectiveness? Can they be improved upon?
· Which of these additional profit models can you adapt in your business? Which one(s) could you implement immediately? Which one should be your focus?
· What can you do to develop a profitability mindset in your business and with your staff?
· Which ones do your competitors use?
1. Customer Solution Profit – Invest upfront for long-term gains
This model is based on front-end loading your time, for long-term pay off. Intense, up-front dedication to uncovering your client’s needs and desires means that after a period of time; your philosophies, products, services and solutions become interwoven into their daily lives. It is at this point that your costs go down and your revenue goes up. Don’t continue to provide small, incremental, non-profitable improvements to the things you are already doing well, focus on the big stuff; the real needs of your customers. Invest your time and energy in learning everything you can about them so that you can create meaningful solutions to their real-life problems. You may lose a little money for a short period of time, but you will make much more money for a much longer period of time, with this approach.
Example:Consider doing this as needed, throughout the life of your business:
· Live on-site or virtual voice or chat interviews with individuals AND groups
· Mass surveying on your social networks
· In-houseprivate consultations; Case History/In-Take forms; 3-point mini surveys monthly; client question of the day; full blown client questionnaires
· Meticulous, active record keeping that will enable you to act on your findings.
It will be hard to build any additional profit models, if this one is not done first.
Big transactions come with great relationships
2. Pyramid Profit – Different product; distinct customer
This is creating a sales system, not just selling a product. It includes having products at more than one price point, including low end loss leaders and high end profit-generators. Mattel’s Barbie is a good example. They sell a Barbie at $20-$30, but are always at risk of imitators under-cutting. So, Mattel sells a $10 Barbie to seal off that risk. It’s at the bottom of the pyramid, it’s barely profitable, but it prevents their competition from establishing a connection with their customers. All clothes and accessories are compatible with the $10 Barbie, which still lends to profitability. Now think about Mom. She grew up with Barbie and remembers her fondly, and mom now has money to spend. The introduction of Mattel’s $200 Collector Barbies, provides huge satisfaction to mom, and huge margins to Mattel. Different product, distinct customer sets.
Example: You develop a 2, 3 or 4-tier system for select facials on your menu based on client’s time and budget. The goal is to continually graduate each of your clients to the “excite and experience” levels. Work hard at ensuring these two tiers provide your clients with the most benefits, and you with the most profit, which isn’t always easy.
· Tier 1 Entry Level (Mini) – 6 steps – 25 minutes
· Tier 2 Explore Level - 8 steps – 50 minutes
· Tier 3 Excite Level – 10 steps – 80 minutes – 2 add-ons
· Tier 4 Experience Level – 12 steps – 110 minutes – 4 add-ons
3. Multi-Component Profit – Same product; several businesses
Your business platforms/outlets vary in profitability. Coke has their one product that provides them with several opportunities for a sale. They sell it in grocery/convenience stores, restaurants and vending machines. If you were to calculate how much you pay per ounce from each of all three of those outlets, you would see dramatic differences, yet you might purchase a coke at every price point, depending on where you were at. Same product, several businesses. Where you really begin to maximize profitability, is when you deliberately target and grow your most profitable business outlets to also become your highest purchasers.
Example:You develop and sell your Private Label product line:
· From your spa(s)
· From your e-commerce website
· From the shopping channel
· Through world-wide distribution channels
· International license
4. Profit Multiplier – Different products; same original asset
This is taking one skill or product and re-engineering, reusing, and giving it a different form, to make money from it in 5 or 6 different ways. Why keep re-inventing the wheel? Lower your R&D and enjoy profits from numerous different products spun off from the same original asset. It’s easy to see only one way of making a profit, but if you open up your mind, you’ll see there are many.
Example: You develop a spa course on Professional Draping Techniques, and sell it on 3, 4 or 5 different platforms:
· Live classroom courses with hardcopy learning materials
· Packaged courseware with hardcopy learning materials
· Online video with soft materials
· Self-taught program through downloads
· 2nd party teachers/educators.
5. Entrepreneurial Profit – Profitability as a way of thinking
This is creating a psychology of saving and making yourself the example. Here, profitability is a way of thinking; “you can’t afford to operate any other way”. Don’t be afraid to preach frugality to your staff, with absolute commitment. Cost containment and ongoing cost reduction, are crucial. Demand best pricing from your sources, but also request creative support and ideas on better, more cost-effective ways to do business. Experiment a lot – ask hard questions about every expense – plan in advance - always play with the math and peel off the top layers to avoid wasted time and energy. Decisions are based on rational, commonsense, profit-seeking activities; this is true entrepreneurship.
Entrepreneurs continually strive to bring down their break-even point by reducing costs (especially fixed costs)
3 More Examples
Think niche. Your reputation as a specialist within your segment allows you to enjoy lower costs and a shorter selling cycle, due to your knowledge and reputation; better pricing through volume of sales; more rapid penetration through higher exposure; and better profits through easy replication.
Brand impact is cumulative and building it requires persistence. But with brand recognition, you will enjoy the ability to charge premium prices, and therefore the highest profitability. Think Nike & Starbucks. Which Spas that you know of, might fit this brand profit model?
After Sale Profit
In this model, the initial purchase creates a whole new mini-market of stuff that your clients just have to have. The frequency of purchases within this new mini-market that has been created, can be 10x greater than the frequency of purchases of the original item. Think about the services you know are revenue generators…you MUST condition staff to sell products because this is your profit pathway!