The Profit Model Checkup is a tool and part of the Ten-Type-Of-Innovation macro method (also described here). The first of the Ten Types Of Innovation describes innovative profit models: New ways to turn a company’s offerings or its undiscovered value into cash.
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Application of the Profit Model reflect a deep understanding of what customers actually value and where new revenue and pricing opportunities exist. Innovative profit models often challenge the boring basic assumptions of an industry sector on the questions of what should be offered and what should be charged for it. This accounts for much of their strength: In many industries, the common profit model has not been challenged for decades.
Common examples of profit model innovation include premium products (and therefore premium prices) and auctions. In the latter, the market determines the price of a product in demand.
The ideal profit model varies greatly depending on the industry and business context: a new entrant to the industry will design its profit model to be low-threshold for customers to try, while an established industry leader will tend to build customer loyalty to prevent potential brand switching. To put it simply, on the one hand it is an offer for sporadic purchases – sporadic and subject to a fee. On the other hand, it’s about subscriptions.
One constant can be observed in Profit Models: To be successful, it must go hand in hand with the company’s all-encompassing strategy – perhaps more than any of the other nine Types Of Innovation.
Successful Profit Models in Practice:
– Gillette: The razor handle is sold below value to lock customers into regular purchases of expensive matching blades (copied from computer printer/ink cartridge manufacturers).
– HILTI: In addition to power tools, Hilti offers a service that includes spare parts and repair for a monthly fee.
– Next Restaurant: Chicago restaurant chef Grant Achaz sells dinner tickets in advance. This gives him capital to work with. In addition, guests are not billed for the price of their meal, but for the time of their visit: this makes eating times outside rush hour more attractive and increases table occupancy.
