Aopcover_1Profitability2
The Second Model which Zhao describes is the Pyramid Profit Model

The firm typically has a slew of products. The products at the bottom of the pyramid serve as a firewall . These act as a barrier for potential entrants and usually these are manufactured and sold very very efficiently. Most often , the company might also end up losing money. However , it more than makes up in the top rungs of pyramid. The profit generators are at the top.
Very very few companies manage can get to maintain and run this profitability model. One of the most important reasons for the success of the model is that customers themselves need to foram a hierarchy with different expectations and attitudes towards the product. The best example one can think of is Barbie doll.
At 10 dollars, a barbie doll is with in the reach of umpteen customers, but however, the real money is made at the top end of the product line where niche barbie dolls cost 200 dollars. Now if one looks at the customers, they themselves are at various socio economic strata and hence end up buying barbie dolls placed at various points of the pyramid. This is one way of explaining the success of barbie dolls

What are the other products that one can think of :

Cell phones like Nokia where there is a product at each price point
iPod where ipod shuffle, mini, ipod and other powerful feature products are available at each price point..
Software products : typepad itself, where basic,professional versions cater to various customers who can afford / want various features.

So, is this model all about segmenting the customer base and having price points so that the lowest rung serves as a firewall and the upper rung serves as revenue generators ?

What are the critical success factors for this model to flourish ?

  • Meaningful segmentation of the customers
  • More value in the age of customer life cycle should result more revenue for the company

More thoughts on Pyramid Model in the next post.

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