Profit, many would say, is profit. But in reality, profit comes from several different sources, and the type of profit you are getting in your business can be very important in thinking about your strategy. Profit that comes from a temporary or threatened situation, for example, should be treated quite differently from profit that comes as the result of your brand reputation (assuming your reputation is solid, of course!).
Let’s look at the different types of profit that most companies get:
1. Capital profit – profit you make as the result of owning capital assets, such as a building or equipment.
2. Labor profit – profit you make as the result of employing people.
3. Process profit – profit you make as the result of an action that you perform.
4. Brand profit – profit you make because people pay more for your products or services as a result of your brand.
5. Relationship profit – money you make because of a specific, unique relationship with another person or organization.
6. Information profit – money you make because you know something that your customers or suppliers do not (for example, you have a customer list that allows you to sell products at a premium that your suppliers could sell directly).
This is not an exhaustive list, but it gives you a good sense that money can be made in a lot of different ways. Most businesses make profit in more than one of these ways – it’s not unusual for a manufacturer to have capital, labor, process and brand profit, for example.
The reason flavors of profit can be important in strategic planning is that each creates a unique set of strategic issues as well as competitive dynamics in your industry. For example, information profit has been eroding in many industries because the Internet has enabled buyers to research primary suppliers and cut past traditional intermediaries, such as distributors, in some markets.
Some sources of profit – labor, for example, and brand – can be problematic because they erode as they are used. Relying on your brand for profit involves charging more money for your products or services – which changes the ratio between price and value delivered. Unfortunately, while your brand can enable you to do this, doing too much of this will diminish your brand reputation and, as a result, your ability to use brand to increase profit. So, while brand can be a great source of profit, relying on it too much can lead to killing the goose that laid the golden egg.
What kind of profit does your company make? Are any of the types of profit you earn more or less stable – or are some continually fluctuating due to technological or competitive pressures? When evaluating profitability in your strategic planning, you might find it useful to break down profitability into different types, so that you can think about different strategic responses and choices that will enhance your profit growth in the future.
© Copyright 2011 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.