The Art and Science of Profitable Business Design
Business is all about solving people’s problems — at a profit.
~ Paul Marsden
In Search of Profit
In recent years, the quest for profitability has drastically increased. We don’t want more revenue — we want more of what makes us “rich” aka profit. However, with time also comes redundancy, changing market patterns, trends, and saturation. A lot of uncertainty. A storm we are probably facing for the first time. The power equity markets hold has been ever-increasing and gaining momentum too, and has convinced people of this assurance and a golden ticket to the top — which is rather easy. All they have to do is build a start-up in the next big thing, take your bet whether it’s your hunch or a fad (because hey, analysts don’t know anymore, or do they?), and then apply for funding, hire an expensive consultant, go public, get listed, scale tremendously, become a juggernaut, then get acquired and then rinse and repeat. “Become a serial entrepreneur,” they said, “it will be God-like,” they said. But it is not that easy, and this is the very phenomenon that has served as a catalyst for what we call “stupid business models.”
If you want to stay in that green zone, lush meadows of profit, as a leader, business designer, or business owner/entrepreneur, there are a few personal questions1 you must understand (Slywotzky, 1997):
~ What makes your business profitable today?
~ How will this happen in the forecasted future?
~ Who will your most valuable clients be?
~ How are their main priorities going to evolve?
~ How can you redesign your business models while being customer-centric but also profitable?
Cracking these, or even articulating them well, is the first step towards ‘growth.’
Busting the Market Share Equals Profitability Myth
Now, market share has long been a metric for measuring success. Some newbies to the field still navigate the business world through this notion. But being the “market leader and profits will follow” has not always been the case. Nokia, Kodak, GM, and others, despite having the first or second rank of being a market share leader ultimately saw a downturn because market share ≠ profits. This blow to the organization as well as shareholders led to radical shifts in their business design. This search for profit added more value, than the drive to be the biggest and most known.
The Effect of Organizational Structures
In a top-down hierarchical system within an organization, ‘hunches’ of managers and other employees, may fail to make it to the top. Perhaps, this played a major role in the 80’s especially in the West when employees may have started drawing out the broken link between being the market leader and being a profitable business with an enthusiastic customer audience base. Hence, most business designs today are more agile in nature and allow for a decentralized organizational structure, especially one where there is an integration of both, a top-down as well as a bottom-up flow of information that play interdependent roles in shaping an effective operations strategy2 (Kim, 2014.)
But today, as profits increase, so do areas of the opposite.
”No-profit zones are the black holes of the business universe. In a physical black hole, light waves go in, but never come back out. In an econmoic black hole, investment dollars go in, but the profit dollars never come back out.”3 (Slywotzky, Morrison, 1997.)
With everyone showing up to the market in this information age, with branding more hypnotizing than the other, and prices lower than its competitors, companies create dangerous sinking sand zones for themselves. To stay afloat without succumbing to this ‘peer pressure’ is crucial in order to stay profitable in the present, while simultaneously preparing for the future.
Achieving Growth Sustainability
As discussed by Slywotzky and Morrison, in their articulation of The Profit Zone, there exists, a curse to every aspect of growth — namely three main ones. One of these happens to be that growth is achieved when the business design of a company is stretched to customers it was not intended to serve, may this be through market development or diversification4 (Meldrum, 1995.) In order to drive trust in these new markets, the price points need to be lowered, hence the “cost of selling to new customers is much higher than the cost of selling to existing customers5 (Aydin, 2005)” for the business. This leads to a reduction in profit margins aka profitability.
How then do you decide on growing without taking a blow to profits? Here’s a chart I have laid out:
To achieve sustainable growth you need unparalleled intel on your products and customers. Why are you selling to them? Why should they buy from you? Why are they buying from you? Which of their priorities drive this behavior? And this can be an overwhelming ask. But the easiest route to take is, to flip the value chain. In order to be customer-centric, you need to be customer first.
Start with what your customer needs. What is their priority? Then map if your channels satisfy those needs, with the products and services that are to flow through them. If your offering itself is not compatible, then it is probably time to rethink the whole business. This can and should be done in-house, but not the way that it has been done for a while now. For businesses to be thinking about themselves 24x7, thinking about profit is valid — but not being obsessed with themselves.
I call this ‘the business ego’ — a phenomenon when an organization considers itself the source of all knowledge. That every idea, every problem, can be solved from the inside, with just another meeting, just another cluster of post its, just a few more, well-phrased hypothesis, and the list goes on.
The problem here lies in the fact that you can NOT be customer-centric and self-centered at the same time. Value is a migrating bird today. And there is information — more often than not, the info is out there. Seek out as many meetings as possible with your client to understand them. All that you need to know is just a couple of external meetings away. Not ‘with your team.’ That comes later. CUSTOMER FIRST. Stick with the theory, or do not embrace it at all. To follow through halfway is not helpful for anyone who is a part of the value chain.
Another important virtue in business design is humility — understanding that your product or service is not God to anyone. You play a minuscule role in your customer’s life and that’s okay, you do not need to inflate it, but you do need it to be a delightful experience. The key is not to force yourself into your customer’s life (essentially how paid ads work) but rather, to fit seamlessly like a puzzle piece in the right place.
To do this well, is to integrate designers — especially strategic business designers in the process. Designers are a perfect, eclectic mix of both right-brained creatives and left-brained analytics. Creativity and data are the two pillars of an all-rounded approach to value creation, this is brought forward specifically via designers. Their flexibility welcomes greater potential to structure and accomplish goals in an organizational manner not following an obsolete traditional path that was once focused deadly on financials and not the consumer. As of today, integrating all aspects of the business is affirmative with design thinking.
What a business designer would do for a company focused on increasing its profitability is design a flow for constant customer information to enter the organization in real time. This is true design thinking. To correctly identify and phrase the problem — to treat the root cause instead of just the symptoms. Businesses that lack this information often don’t know what’s going wrong where. They think they’re great because everything is going well internally — then why should it not reflect as well on the outside? I’ve seen this firsthand with colleagues and clients. Get feedback, conduct surveys, be sensitive, and “f*ck around and find out” as they say. There’s a reason why one of the most profitable business models today is the business of selling knowledge.
I hate to repeat myself, but if you’re not looking at the customer, you’re doing it all wrong. We need to substantiate the idea that empathy leads designers to assume they are the customers, who play through that simulation — which is a flawed approach. When the target audience is easily available for you to conduct market research — why are you not doing it?
Product Profit Hierarchy
While profitability is a complex phenomenon there exist multiple profit models and one such interesting, and rather relevant case study to all of us is that of Mattel. The company known for producing Barbies followed something called a ‘Product Pyramid Profit’ model:
This model is used by some companies that offer a range of related products at different price points, catering to various consumer segments and maximizing profitability. It typically involves a pyramid-like structure with three main levels: low-priced products at the base, mid-priced products in the middle, and high-priced premium products at the top, all structured and prioritized according to their customer’s preferences and perceptions.
Mattel, effectively uses this model. At the base of the pyramid, they have standard Barbie dolls and related accessories targeted at price-sensitive consumers. Which captures a large market share due to affordability and minimal competition because of its brand name.
In the middle, they introduce specialty Barbie dolls with unique features or tie-ins to popular characters or franchises. These are priced higher and attract consumers willing to invest more in a collectible or distinct Barbie doll.
At the top of the pyramid, Mattel offers limited edition, collector’s edition, or premium Barbie dolls. These are high-priced and targeted at avid collectors or enthusiasts willing to pay a premium for exclusivity or rare features. (As a child, I loved my remote-controlled, ice skater Barbie but she was probably in between the upper two levels of this pyramid.)
Anyway, by having offerings at different price levels, Mattel maximizes its profits. Consumers enter at a price point that suits them, and as their interest or willingness to spend more grows, they can move up the pyramid. This approach safeguards profits by capturing a broad range of consumers and their purchasing capacities while maintaining the allure of exclusive, high-profit offerings at the top.
This is part 1 in the series,
Thank you for reading! Leave me a comment on what aspect you would like me to focus on in the next part.
Slywotzky, A. J., & Morrison, D. J. (1997). The Profit Zone — How strategic business design will lead you to tomorrow’s profits (1st ed.). Three Rivers Press.
Kim, Y. H., Sting, F. J., & Loch, C. H. (2014). Top-down, bottom-up, or both? Toward an integrative perspective on operations strategy formation. Journal of Operations Management, 32(7–8), 462–474. https://doi.org/10.1016/j.jom.2014.09.005
Slywotzky, A. J., & Morrison, D. J. (1997). The Profit Zone — How strategic business design will lead you to tomorrow’s profits (1st ed.). Three Rivers Press.
Meldrum, M., McDonald, M. (1995). The Ansoff Matrix. In: Key Marketing Concepts. Palgrave, London. https://doi.org/10.1007/978-1-349-13877-7_24
Aydin, S. and Özer, G. (2005), “The analysis of antecedents of customer loyalty in the Turkish mobile telecommunication market”, European Journal of Marketing, Vol. 39 №7/8, pp. 910–925. https://doi.org/10.1108/03090560510601833
By Shevaun Pimenta
