June 01, 2011

Profit Models

I get to see a lot of different business models.  Each model has a clear path to profitability.

There are businesses that have high return rates.  These businesses require high levels of customer productivity, in order to generate profit.


Demand
$5,000,000
Net Sales 75.0% $3,750,000
Gross Margin 55.0% $2,062,500
Less Marketing Cost
$750,000
Less Pick/Pack/Ship 10.0% $375,000
Variable Operating Profit
$937,500

Many businesses do not have a returns problem, meaning that customers keep what they purchase.  When that happens, customer productivity doesn't need to be as great in order to generate profit ... in our case, productivity is twenty percent less, and yet, profit is the same.



Demand
$3,905,000
Net Sales 96.0% $3,748,800
Gross Margin 55.0% $2,061,840
Less Marketing Cost
$749,760
Less Pick/Pack/Ship 10.0% $374,880
Variable Operating Profit
$937,200


I work with a lot of businesses that are struggling.  You can tell that the business had to manufacture profit via efficiency ... it becomes obvious when looking at the metrics.  Take a look at this one:



Demand
$2,540,000
Net Sales 90.0% $2,286,000
Gross Margin 65.0% $1,485,900
Less Marketing Cost
$457,200
Less Pick/Pack/Ship 4.0% $91,440
Variable Operating Profit
$937,260


Productivity is really, really low in this case.  However, the business managed to optimize gross margin dollars, and are running an efficient distribution center.  As a result, the business generates a healthy amount of profit on low productivity.


The internet world loves business models that "scale" ... meaning that you generate profit on low margins and high volume.  Here's an example:



Demand
$14,525,000
Net Sales 90.0% $13,072,500
Gross Margin 15.0% $1,960,875
Less Marketing Cost
$500,000
Less Pick/Pack/Ship 4.0% $522,900
Variable Operating Profit
$937,975


This is a very different business model, isn't it?  You need a high level of demand, a high level of marketing productivity, and an efficient expense structure.  Combined, you end up with the same level of profitability that you obtained via the other business models.


The pundits will tell you what kind of business model you have to employ ... hint ... they really like one that "scales", one with low margins and high volume.


The reality is that there are many ways to generate profit.  Chart your own course.

1 comment:

  1. Great post Kevin, any detailed sheets or more info on profitable models and how they look?

    ReplyDelete