The Art of Profitability - Book Summary and the 23 profit models
The book describes 23 profitable business models that the protagonist, Zhao, identified. It teaches through parables, telling stories of companies that applied each model to generate profit. Easy to read, but it's dense, full of complex ideas that need to be revisited several times to truly absorb them.
Book: The Art of Profitability
Author: Adrian Slywotzky
Rating: 10⁄10
Date Read: May-2018 - September-2018
Description:
Fantastic. The book is so good I read the whole thing in a single day. It describes 23 profitable business models that the protagonist, Zhao, identified. The book teaches through parables, telling stories of companies that applied each model to generate profit. Easy to read, but it's dense, full of complex ideas that need to be revisited several times to truly absorb them.
I liked the models so much that I'm going to take detailed notes on each one of them, along with the homework Zhao assigns.
PS: This article will be updated as I take the notes for each model
Customer Solution Profit: Costumer Solution Profit
Lose money for a while, as you find and develop the specific solution for a customer. Once your service is integrated into their operation, profit.
To illustrate this profit model, Zhao tells us the story of a company that sold financial information to banks and was having profitability problems, Factsect.
This company generated $20 million in revenue with just 30 employees. Its competitors generated $40 million with 400 employees.
Factsect was an extremely profitable company.
They operated like this:
First of all, they sent a team of 2 or 3 people to work with their clients. That team spent as much time as needed learning everything they could about them. How their operation worked, which systems worked and which didn't, and what the real need the company faced was.
With that information, Factsect developed a tailor-made solution for that client. They invested a lot of time and money building a product that would solve all of the company's needs and could be integrated into their work environment.
They invested a lot of money in this phase, and billed almost nothing.
Until the moment the product was ready and started being integrated into their client's day-to-day. The solutions were so well thought out and specific that they generated massive value for the client, increasing the company's revenue.
And at the same time, the three people who had spent all that time figuring out how to integrate it were no longer needed - with just someone handling maintenance, Factsect kept its clients happy with a single employee.
Companies that use this model masterfully: Palantir(?). Send me an @ on Twitter if you can think of more.
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Pyramid Profit: Pyramid Profit
No, this has nothing to do with pyramid schemes like TelexFree and BitConnect.
It's a very interesting profit model, and easiest to spot in retail.
To illustrate it, Zhao uses Mattel.
Mattel sells all kinds of toys, one of the most popular being Barbie dolls.
A standard Barbie doll goes for around $30.
So, we have a product line at a mid-range price:
But if Mattel isn't careful, its competitors can produce cheaper dolls and start winning market share.
So you build a wall to stop your competitors from doing that.
Mattel develops a $10 Barbie doll. It's barely profitable, but it keeps other companies from stealing its slice of the market.
Now, we have one product line at a mid-range price, and another at a low price:
Now that Mattel has established mid-priced and low-priced product lines.
What does it go after?
Luxury products.
Barbies with much higher margins, at $300.
In the end, you wind up with a carefully planned system to defend yourself from competitors and generate profit at every price point.
Companies that use this model masterfully: Apple, car manufacturers.
Multi-Component Profit: Multi-Component Profit
A pretty common profit model. It should work for most B2C businesses.
As an example, Zhao tells two stories, one of them about Coca Cola.
The secret of this business model is having many business components. With just one product, you can have several businesses. Some of them very profitable. Others, not so much - they may serve another purpose.
Coke, for example, has a few components:
- Sales in restaurants
- Sales in supermarkets
- Sales in vending machines
Each of these components has a different profitability.
Think about how much you pay for 100ml of Coke in each situation.
At a restaurant, a can goes for around R$5. That means 100ml costs R$1,51
At a supermarket, you buy 2 liters for 8 reais. That means 100ml costs R$0,40.
In a vending machine, it's around R$3,00 - R$0,90 per 100ml.
The difference between multi-component profit and pyramid profit is that the consumer buys the same product at every price point - the same product, several different businesses.
Switchboard Profit: Switchboard Profit
One of the most elegant models in the book, and personally, one of my favorites.