The Profit Equation: How to Predict and Capture More Profits

The Profit Equation: How to Predict and Capture More Profits

Every effective executive focuses on optimizing profits because it rewards the company for the risk, effort, and foresight of running a business and it ensures the company’s future.

My clients always ask me about ways to consistently and predictably increase their profits. Of course, the first actions are to expand value, raise prices, reduce discounts, focus on profitable segments, and cut production costs. This is Business 101, all easier said than done (although contact me for methods that can help you implement these.)

Here’s a simple, yet elegant model I use to help my clients predict and capture more profits. See the diagram above.

The Profit Equation

Consistent profits come from providing your target market with products that are scarce, desirable, and necessary. Keep in mind that different market segments consider these elements differently. For example, gold may be necessary for manufacturers, desirable for consumers, and scarce for certain investors.

Scarce: if what you offer is exclusive, unique, or rare then you can set prices that reflect the market demand. Compare this with abundant availability when the price gets set by the lowest-cost producer or most desperate vendor. Marketeers frequently use false scarcity to drive demand, such as using a deadline, expiration date, or limiting quantities. For example, DeBeers control of the diamond supply inflated prices until Russian-sourced diamonds disrupted the consumer market and now cheap Chinese manufactured diamonds rival the best natural stones. Scarcity depends on supply/demand, technology, politics, and culture.

Necessary: when the market needs what you offer, they’ll get it, or a substitute for it. This includes items like housing, food, fuel, and utilities. Necessity depends on culture, geography, and the market.

Desirable: when the market wants what you’ve got, they’ll prioritize, pursue, and pay for it. If it’s not desirable, you may not be able to give it away. You can increase desirability through marketing. Over time, what’s desirable become necessary (also known as the Kano Model). A good example: smart phones, which when introduced were desirable and now considered necessary by much of the market. Desirability depends on culture, market preferences, perceived scarcity, prestige, and fashion.

When your products miss any of these three elements, profits become unpredictable and variable. Let’s dig into these combinations.

Scarce & Desirable

If your offering is scarce and desirable but not necessary (such as jewelry for consumers), you’re offering a luxury that provides profit based on market conditions and market discretionary income. You’ll do well in up markets and may suffer in down markets. Add necessity by marketing and targeting markets that find your offering necessary.

Scarce & Necessary

If your offering is scarce and necessary, but not overtly desirable (like essential utilities), you’ve either got a saturated market with little room to improve profits or the market will have well-funded competition (such as solar power versus other ways to generate power.) This can be a viable segment for big business, but not for small business. Add desirability through innovation and marketing.

Necessary & Desirable

If your offering is necessary and desirable but not scarce, you’ve got a commodity where the main differentiation becomes price. Making consistent profits becomes a challenge in a price-driven market. Add scarcity through innovation, packaging, location, etc.

Predicting Profit Potential

Here’s the profit prediction secret to this model: determine whether any of these three factors are increasing or decreasing. You want to choose offerings where the factors are stable or increasing. Decreasing factors indicate a need to upgrade the product, marketing, target customer, or if you need to pivot away from this market.

Put This into Action

Thinking about your main offering, on a scale of 1 to 10 (10 being high), how does your target market think about the scarcity, necessity, and desirability? What can be improved? Where are you at risk from competition or changes in culture? Where could you use some insight about what to do next?

Want to discuss how to apply this model to your business or learn more about ways to increase your profits? Let’s talk! Just contact me and we’ll set up time. It will be worth your while.

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