All successful businesses include some type of Profit Model, which is essentially a strategy addressing the core elements of a business’ operating system that contribute to making the company viable and profitable. The overall Business Plan or Model creates the basis for the Profit Model by determining what the business produces or offers and how that is generated, sold and delivered.
How a business produces profit can vary considerably based on the Profit Model. Some companies, such as Facebook, offer a free product while generating revenue from advertising. Others, such as Skype or LinkedIn, offer a free but limited-feature product which encourages customers to pay to upgrade. A common profit model used by drug companies is to base the price on the demand, the value to customers, or upon an internally defined cost structure. Businesses such as the Dollar Shave Club have chosen to derive income through a low-priced, recurring subscription and to offer an inexpensive but disposable product that will need replacing.
Some companies, such as volume discount plans, offer tiered pricing based on the scope of work or volume of services purchased. Earning income as a percentage of each sales transaction is a model exemplified by Assurant. Another profit model, this one used by Primavera, is to offer a low-priced product but charge extra for product support.
DEVELOPING AN EFFECTIVE
BUSINESS PROFIT MODEL