The common formulas for achieving profitability are straightforward: charge more for the services you provide than their production costs and apply an appropriate markup on products sourced from suppliers. If the path to profitability is easy, why does sustaining long-term profitability remain elusive?
In The Art of Profitability, author Adrian Slywotzky introduces several profitability strategies, each offering a unique approach to generating profit. Below is a summary of many of Slywotzky’s strategies combined with a few of my own. This is a long read so pour yourself a cup of coffee and settle in. I hope this list inspires you to think beyond common profitability methods and makes you rich.
1. Pyramid Profit: Focuses on a tiered product offering, starting with a low-cost entry product and progressing to premium product offerings. For this example, think Lego. Lego sets range from under $10 – $700+. Lego makes very little profit on simple, low-cost kits and increases its profit margin on the more complex, higher-priced kits. A more obvious example of the pyramid profit model would be Apple. With each new iPhone release, Apple offers a series of phones that increase in price (and profit margin) based on the features available on each device.
2. Multicomponent System Profit: This is one of my favorite profitability methods. In this example, a company sells the same product, often to the same customer for a different price depending on where the product is offered. For example, an ounce of Coca-Cola may cost $.13/ounce at the grocery store, $.19/ounce at a convenience store, and $.30/ounce at an NFL game. Same product, same customer, different price, different profit margin.
3. Matchmaker Profit: Here, a company acts as a broker or intermediary, matching buyers and sellers and facilitating transactions between parties. Think business broker, realtor and Airbnb.
4. Time Profit: Companies generate profit by offering products or services that save time or accelerate outcomes for customers. Think FedEx Overnight Delivery and Ozempic.
5. De Facto Standard Profit: I like to think of this model as the bandwagon profit model; the more people buy a product, the more in demand it becomes. Is anyone else flabbergasted by the current “Stanley Cup Craze”? William Stanley Jr. invented the Stanley Cup in 1913, and thanks to social media influencers,111 years later, this product has become a “must-have” status symbol among America’s youth.
6. Blockbuster Profit: Blockbuster – as in a new hit movie; not the failed video rental business. With this strategy, businesses focus on creating a high-demand, high-margin product or service that generates significant revenue in a short period of time. This strategy is all about being first-to-market with a new product or service.
7. Specialization Profit: Focusing on a niche market or specialized product/service to command premium pricing due to expertise or uniqueness. I had a client in the motor oil industry that successfully used this strategy. They took the same motor oil they had been selling for decades and repackaged it into separate product lines for ATVs, motorcycles, cars, etc. Customers paid more for the product when they thought it was designed especially for the power sports vehicle they owned.
8. Installed Base Profit: Profit comes from selling complementary products to an existing customer base. Xbox does a nice job utilizing this profit model. Customers buy the hardware console and spend significantly more money on game downloads, in-game purchases, and data storage.
9. Value Chain Position Profit: Positioning oneself in a lucrative part of the supply chain, controlling a critical step or component that adds significant value. Amazon is a great example of a retailer that has developed a stronghold in the supply chain by connecting vendors and customers.
10. Cycle Profit: Timing is everything; making a profit by capitalizing on industry cycles, such as boom-and-bust markets or seasonal trends. Remember during the COVID-19 pandemic when testing centers (often tents staffed by questionable “medical professionals” popped up in nearly every parking lot in America?
11. After-Sale Profit: Offering add-ons, maintenance, or upgrades after the initial sale to create recurring revenue. This profit model is becoming more prominent, especially in the technology industry where sellers offer warranty packages for a nominal fee.
12. Customer Lock-In Profit: Building systems, platforms, or networks that make it difficult or costly for customers to switch to a competitor. When is the last time you switched your online bill pay account from one bank to another? Banks spend millions annually on advertising campaigns trying to get customers to switch with little success. The idea of switching is often so painful, consumers would rather stick with their original bank than take advantage of lucrative switch promotions.
13. Razor-Blade Profit: Companies sell a durable product at a low price (razor) but make money from ongoing sales of consumables (blades).
14. Transaction Scale Profit: Profits are driven by increasing the volume of transactions, often at a lower margin but benefiting from economies of scale. Credit card companies, eBay, and PayPal are examples of companies using this profit model.
15. Profit Multiplier: Using a core product as a foundation, then multiplying profit by selling related products, services, or extensions. You could also use the term “loss-leader” as the title; a common strategy used by fast food restaurants and retailers, especially during the holiday season.
16. Recurring Revenue Profit: Generating stable, ongoing income through subscription models or long-term contracts, ensuring predictable cash flow. This revenue model is becoming commonplace in organizations and for good reason. The more monthly recurring revenue a company has, the larger the multiplier it will receive when sold in the future.
17. Scarcity Profit: Creating a perception or reality of limited availability or exclusivity, which drives higher demand and premium pricing. Every time a celebrity “drops” a new lipstick or custom shoe design on TikTok or Instagram and you rush to buy it, you are falling for the powerful scarcity profit strategy.
18. Brand Profit: Building a strong, trusted brand allows businesses to charge higher prices and achieve greater profit margins. Starbucks prices its drinks based on the “premium experience” it provides and uses price hikes to differentiate itself from affordable chains to reinforce its premium image.
19. Experience Curve Profit: As companies gain experience in production, costs decrease, and profits rise through improved efficiency and learning. I like to think of this model as the Expansion Profit model. As a retailer expands operations across the nation, they take advantage of experience and bulk order discounts, making it easy to grow their profit margin as they grow their enterprise.
20. Obsolescence Profit: Designing products or services with limited lifespan or relevance, driving repeat purchases or upgrades over time. This is a strategy commonly used by infomercial advertisers offering deals or products “for a limited time.” I remember jumping off the couch and heading to McDonalds because my son saw a commercial that the McRib sandwich was back. This is not me bragging.
If you are still with me, thank you! I encourage you to share this post with your team and use it as an exercise. By looking at your business through the lens of the 20 models shared, perhaps you will discover a new pricing strategy that will help you earn more revenue, improve customer loyalty, and generate higher profits.