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Estimate the Profit Consequences of Adding More Benefits to Grow More Rapidly

Jan 4, 2008
From space many places on Earth look pretty flat. From the ground more obstacles become apparent: Granite mountains loom in places where chasms divide neighboring areas. Both perspectives tell you something you need to know.

The space view shows you the most direct route as the proverbial crow flies, while the close-up view shows you obstacles that are well worth avoiding where that's possible. In this article, the broadest perspective, like that from space, is emphasized. That perspective encompasses expanding your business model (the who, what, when, why, where, how, and how much of your offerings) in volume-improving ways.

In considering how to expand your business model's delivery of offerings and benefits, you should be guided by what will be easily understandable and desirable by your stakeholders (those who are affected by what you offer) . . . and where the adjustments will provide more profit for businesses and more effectiveness for nonprofit organizations.

Business model innovation is something that many organizations struggle with. In this article, I've broken out the elements and added continuing examples to make innovative business model thinking and analysis easier to do. This article's material will, however, be clearest to those who have already read about continuing business model innovation.

Expand What You Do Now

Unless you are providing a very small percentage of the needs of each customer or beneficiary, growing by 21-fold requires adding customers or beneficiaries. Because so many organizations can expand to provide 21 times the number of customers or beneficiaries, that's a great place to begin. You should start by considering who you will serve as these added customers and beneficiaries and where those benefits will be delivered to make the expansion more practical.

Let me share a story with you that I first examined in an earlier book to help make that point about who and where clearer. A young married couple, Mr. William and Ms. Dorothy Hustead, bought a small store in a tiny town near the South Dakota Badlands. From 1931 to 1936, they struggled through the Depression serving the town's 326 impoverished residents.

One day in 1936, Ms. Hustead, bothered by the sound of cars on the nearby highway heading for Mount Rushmore, persuaded her husband to expand their business to serve these travelers. Mr. Hustead put up signs on the highway to draw visitors to their store, making a unique appeal. The signs said, "Free Ice Water . . . Wall Drug."

In those days before automobile air conditioning was common, that offer was a powerful appeal. Beginning from this humble expansion of its customer base, Wall Drug now serves more than 20,000 visitors a day during the summer in its Wall, South Dakota, store and many more on its Web site.

Who Is Served and Where

Let's begin considering volume-expanding business models by looking at "who" is served. The lesson is to keep it simple. Change as little as possible while becoming more efficient and effective as an organization for your customers and beneficiaries. The simplest way to do this is to put more volume through an existing organizational structure without adding fixed costs or increasing the ratio of variable costs to sales.

In a for-profit organization you will naturally first want to attract the most profitable potential customers. If current customers buy a very small percentage (say 1 to 2 percent) of their needs from you, such a profitable expansion may simply be possible by selling 40 to 50 times more to selected current customers.

You are already spending time and money to gather a small part of these customers' total requirements. In many cases your overhead costs to provide more products and services would not increase.

Let's assume your current pretax profits are 10 percent of sales and your contribution to profits before overhead costs is 30 percent of sales. This circumstance means that selling more of the same mix of offerings at the same price to an existing customer would almost triple the profit contribution margin on the increased sales. Were that to occur, a 20 times increase in volume would lead to a 60 times increase in profits!

See Example 1 if you want to explore how this could happen.

Example 1: Adding 20 Times More Revenues Without Increasing Overhead Costs Speeds Profit Growth

If corporate overhead cost remains constant while profit contribution grows to $6.3 million from $0.3 million, pretax profits expand by $6.0 million (60-fold) while earning the same profit contribution as a percentage of revenues.

Annual Pro Forma Financials Before Volume Expands

Revenues $1,000,000

Cost of providing offerings $700,000

Profit contribution $300,000

Corporate overhead cost $200,000

Pretax profit $100,000

20 Times Volume Increase with No Additional Overhead Expenses

Revenues $21,000,000

Cost of providing offerings $14,700,000

Profit contribution $6,300,000

Corporate overhead cost $200,000

Pretax profit $6,100,000
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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