Invest time and energy in learning all there is to know about your customers. Then use that knowledge to create specific solutions for them. Lose money for a short time. Make money for a long time.
Examples I can think of: Most consumer products, consulting, etc.
Pyramid Profit
Use this strategy when your customers form a hierarchy, with different expectations and different attitudes towards price.
There are customers who have a non-negotiable price; and there are others who’ll pay top dollar for a unique product. But not every marketplace can be stratified in the same way.
A true pyramid system is a system in which the lower-priced products are manufactured and sold with so much efficiency that it’s virtually impossible for a competitor to steal market share by underpricing you. The lowest tier is therefore also called the firewall. Profit generators are at the top of the tier.
Examples I can think of: Barbie dolls
Multi-Component Profit
Coca-cola is one product, but several businesses. Grocery component; restaurant component; vending machine component. Most profits flow from restaurant and vending machine sales.
The difference between this model and the pyramid model is that you buy the exact same product at multiple price points. A can of Coca-Cola at the vending machine costs much less than a glass in a restaurant.
Hotels are another example. The same building can sell you ‘a single room for one night’, ‘a one-day meeting for twenty people’, or ‘a three-day convention for three thousand people’.
Last example would be bookstores. Same inventory of books, but many components. Sell individual books, subscriptions to high-purchase individuals, bundled access to corporate libraries, or even services to local book groups to hold events.
Switchboard Profit
Michael Ovitz started his career as a talent agent in television, where the practice of packaging talent was common.
Because the margins in TV weren’t large enough to absorb the inefficiencies of the typical Hollywood process for developing a movie project, talent agents would put together a package that included a screenwriter, stars, a director, and supporting actors, and bring the entire package to a studio to produce.
But packaging =/= building a true switchboard.
Ingredients for a film:
Source of stories
Package of talent
Critical mass
For a true switchboard model to succeed in the film industry, you need a critical mass of talent in your package offerings. Simply because the sea is so vast—if you only have 1% of talent, studios, actors, writers etc. can choose not to work with you.
At some arbitrary number, say 40%, people would find it hard to not work with you. At that point, things get noticeably easier. Profit per unit of effort skyrockets.
This model works with products as well. Telecommunications company offering equipment, software, services—and everything else—packaged and customised for different needs.
The temptation here is for the switchboard company to start manufacturing their own products. Then, they’d fail to make objective choices in the best interest of the customer. It also erodes trust from suppliers. Everything falls apart. This is the price of admission for this game.
Time Profit
Terry was working in a small but very successful boutique firm staffed by brilliantly innovative folks. The business sells innovations in financial instruments, which would often be copied 9-12 months after they were introduced into the market.
Like Intel, their profits could only be made in a certain time frame before competitors catch on. Unlike Intel, they had a much shorter time frame to milk something. The key then is to speed up the acquisition of new customers rapidly. Basically squeeze it dry first before time is up.
Profit-multiplier Model
Taking one skill and making money from it five or six times. Disney characters—cartoon series, movies, figurines, theme parks etc. This is different from multi-component profit.
The Coca-Cola you get in a can from a vending machine is the same can you get in a restaurant. However, the Mickey Mouse you get on a DVD Box Set is different from the Mickey Mouse Ride in a theme park.
It’s about variations on a theme—finding alternative ways of extracting value from the same asset.