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Profit Models:
Using Business Models for Greater Business Profits
Part 2
In Part 1, you learned about the four components of a useful, profit-boosting business model.
Of course, there are numerous other secondary components to running a business, but your business model will only include them when they are pivotal to your particular business design. For instance, a company which provides on-call doctors would include in its business model their special method for recruiting MDs, which in most companies would be considered part of the secondary HR function.
If each element works well on its own, the value proposition is sufficiently unique and compelling, you can economically and reliably produce value for your market, you have a repeatable and cost effective way of identifying and selling to customers, and finally you can sell things for more money than they cost—you will make money. Generally quite a lot of it.
On the other hand, if any part of the model does not work, in the long run—and the long run could come quite quickly—you will go broke.
That’s the first insight available from a business model. Now you need to know how to put it to work.
List each of the four headings (value proposition, business development system, fulfillment system, profit model) on its own fresh sheet of paper. Then write—in narrative form—how each works in your business. This may take one paragraph per heading, it may take a page. If it takes any more than one page per heading it is probably too complicated.
I’ll be writing in detail about each component in the future, but for now just make sure you can describe each one clearly and simply. If an area is not sufficiently clear to you, then, as Deming says, it needs work—immediately—because this area is holding back your business and costing you money.
Once you can clearly describe each major component, your next step is to improve it. Choose one to work on first. Whichever area you choose to work on, your job is to thoroughly understand how you do things now—writing it out clearly is the test of your understanding. After that you can find ways to make it better. Improvements may come in the form of changes or additions to your existing way of doing business. It might even mean stopping things you are currently doing.
On a fresh sheet of paper, write how that component should function, or would function, if you designed it from scratch. You may keep elements from your existing system; you may totally redesign it. This is a chance to do what Einstein called a thought experiment, to create a workable system which best compliments the other parts of your business. This exercise will give you new ideas to implement, even if you do not revamp your entire operation.
You may also find that for one or more of the four areas you have no system at all. Sometimes you do it one way and sometimes another. You are winging it. This too is costing you—and if you want to maximize your profits, you will have to design a way that works and stick to it.
For now, the process of understanding what you have currently will get you started. We can work on each area in detail later.