Creating a Profit Pool



Creating a Profit Pool

A Profit Pool is a part of a market that offers some sort of economic return to participant players. A good Profit Pool offers a large amount of cash-based profit (we'll discuss the focus on cash later) over a certain amount of time into the future. A less attractive Profit Pool simply offers a smaller profit opportunity, while an unattractive Profit Pool offers net losses to its participants. Simple enough in concept, though quite elusive to properly characterize and exploit. The non-production printer market provides a simple illustration of a Profit Pool view. The offering comprises three parts; the printer machine (two types; ink and laser), supplies, and some level of service. In addition, customers are relatively distinguishable; in terms of size (Fortune 500, mid-size and SOHO), and in terms of industry.

Even more important, a profit-pool map opens a window onto the underlying structure of the industry, helping managers see the various forces that are determining the distribution of profits. As such, a profit-pool map provides a solid basis for strategic thinking. Mapping a profit pool involves four steps: defining the boundaries of the pool, estimating the pool's overall size, estimating the size of each value-chain activity in the pool, and checking and reconciling the calculations. The authors briefly describe each step and then apply the process by providing a detailed example of a hypothetical retail bank. They conclude by looking at ways of organizing the data in chart form as a first step toward plotting a profit-pool strategy (Jones 2008).

Customer Segmentation

Customer segmentation is an indispensable tool for performance improvement, because it answers fundamental questions any company must face. Are we selling to the right customers? Which segments should be the primary target of our product-development efforts, and of our sales and marketing activities? In which regions and countries should we be competing? In which markets can we create differential value? How should we differentially allocate our sales and marketing resources to various segments? To answer such questions, a management team must understand which customer segments are most attractive in terms of size, profitability, and growth. They must also make an honest assessment of their company's capabilities to meet each segment's needs relative to the competition. Some segments “fit” a company better than others that is, the company has greater ability to serve these segments in a way that is differentiated from competitors. Some segments are more profitable, either because they generate higher revenues, because they can be served at lower cost, or both. And some segments are growing faster. Segments with high growth, high profitability, and sufficiently large revenue potential are a company's natural focus. But the company may also be able to adjust its value proposition to serve high-growth customers that are not currently very profitable.

The shifts in the profit pools of the digital economy since 2002 are the result of a number of technological changes that have shifted power from the forces of production to those of consumption, and of the ...