AopcoverI began reading Art of Profitability last night and the most exciting thing about the book is the way of delivering the point using simple schematic diagrams. The book urges the reader to read one chapter a week , try to get the gist of each of the chapter , chew, ruminate, reflect on various businesses that one has come across which fits the models described in the book.

From the title of the book, it is clear that the book talks about various profitability models that are present across successful businesses in various industries. The first model that’s described by the author is :

Customer Solution Profit Model :

Profitability1_1

Invest time and energy in learning all there is to know about your customer. Then use the knowledge to create specific solutions to them. Lose money for a short time . Make money for a Long time.

If one looks at the graph shown, the horizontal line shown is the break even line and in the initial period of time, the business does not make money and after the learning period, the firm reaps high profitability

What are the firms , Industries which follow this profit Model ?

This is mostly the case of firms where its customers are Corporate customers, where there needs to be time spent in understanding the problems and opportunities of each client, customize the solution and then create a terrific value for the customer, in the process, the firm can increase the margins and hence its profitability.
Examples :

1. Oracle when it deployed its ERP and database suite at a lesser cost and then made money by deploying the web enabled erp, sophisticated database products etc

2.Windows: Give explorer free , sustain the loses and then charge for the various add ons  (Operating system).

This model was also heavily relied during the dot com boom. Firms/Websites thought they could built websites, build volumes, understand customers, increase eye balls , and then increase their profitability. Alas! No such thing happened. , which brings us to the important point, in which cases is this profitability model applicable ? Is it worthy enough to spend time to understand customers , in spite of losing money and revenue streams being far away?

Can Delicious make money, while it is understanding the tagging behavior of the online community ? Yes why not, didn’t craiglist make money in the longer run ?

But if one looks at few things that separates the winners from losers , amongst folks who follow this profitability model, it is clear that there are certain traits of the winners like

Clear Execution of the customer involvement plan: What would be the man power deployment in the first month, in the second month, first quarter, second quarter, third quarter, 1 year down the lane , etc? Successful firms have always decreased their people per account deployment and increased their revenue per account as time went by

Get the project/ client first before you market your service bombastically:
Most of the firms have first tried to get in to the market with one client, then built a host of services around the client, leveraged the experience working with the client and then market it to other clients. Classic case of Moore’s product marketing strategy "CROSSING THE CHASM".

Fast Prototyping : No point in spending years together in building a full fledged product. Build a prototype, test it at the client, incorporate the changes asap and deploy a working solution of the product at the client’s side. This becomes crucial as the customer feedback is so much essential during the initial phase of service / product roll out.

Understand customer even though it involves losing Money: Somewhere down the lane, when things get tough , people decide it is not prudent enough to lose money and tighten the belts and make the free service a high premium service, which then makes the user base fly away. This mistake has been committed by far too many firms when they fail to take the decision of making the product/ service a paid service at the right time.Either they are too early / they are too late…This definitely is more of an art and less of science I guess

This model has been far too common in the reading that I have come across . I am awaiting to get fundas from the other profitability models described in the book.
More on it, in the next post.

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