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What is a Profit Model?

A profit model demonstrates that earnings will be sufficient to cover costs.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 27 September 2014
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In order to succeed in any sort of business venture, it is necessary to design and utilize a profit model. Essentially, it is a strategy that addresses all the core elements of the business operating system that go into making the company viable and profitable. Business designs themselves create the basis for the model; without a workable operating structure that addresses production, sales generation, and delivery, there is no working profit model.

Profit models exist as a way of helping any business concern achieve a state where there is money left after all expenses are paid. In short, there is profit made from the business venture. In order to ensure that there is money made above and beyond company expenses, it is necessary to make sure that each component of the company is working at top efficiency and contributing to the financial health of the organization. To this end, there must be a means of publicizing and getting the interest of customers, so sales take place. In addition, the components must be structured so there is a logical chain of events in the production of goods and services and their delivery on the back end.

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The foundation of the profit model exists within the production and operating components of the model. Management must be effective, operating equipment and personnel must be efficient, and the product that is produced must be top quality, but manufactured at the lowest possible cost. One way to ensure this component of the model is working properly is to maintain operating equipment properly, make sure personnel are trained and frequently given refresher training, and that management does not become top heavy with too many positions. Attention to these types of detail will help to keep this portion of the profit model running at maximum efficiency.

The sales and marketing component of the model is the creative component that gets the word out about the products and services offered by the company, and piques the interest of consumers in the products. This may be done with the use of ad campaigns, various sales methods, and cultivating strong word of mouth among consumers. Keeping this operating often means being open to new ways to market the products or developing secondary products that will expand the client base.

For example, many companies provide both a full-featured version of their flagship product, while also offering a scaled down version at a lesser cost. Persons who do not want the full version, either due to cost or the lack of interest in the features, often will go for the basic version. This strategy has worked for everything from automobiles to Internet service and provides a compelling example of how sales and marketing can help keep this part of the profit model working at full efficiency.

Last, delivery of goods and services to the end user is extremely important to the profit model. A company may produce excellent products, but if the buyers cannot receive and make use of the goods, the entire effort is wasted. Making sure that customers receive their orders in a timely manner, and that they have a means of contacting the company with any questions or concerns is essential to a working profit model. Without communication between client and provider, there will eventually be no profit.

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SkyWhisperer
Post 3

@miriam98 - They do share some things in common, like outlining your marketing strategy, fulfillment operations and so forth. But the core of a profitability model is, of course, the word “profit.” When I worked as a consultant for small businesses, I would ask them one simple question: how exactly are you going to make a profit?

Some businesses had no idea why they were pricing their products or services the way they were. They just thought they would price what the market would bear, or imitate the competition’s pricing model. But in a profit model you have a formula—the way you arrive at your profit margin based on calculating all your expenses. This is what should be your main focus at all times.

miriam98
Post 2

How is a profit and loss model different from a business plan? From what I understand some of the components seem to overlap.

CheesePlease
Post 1

In today's world I think a business model benefits from honesty and free content. Because the psyche of people is changing, and because we are all becoming more connected by technology, a strategic profit model that incorporates honesty and "something-for-nothing" really ties people in.

A twitter profit model, for example, may use tweets to convince individuals to click links and ads, generating revenue and providing meaningful and free content.

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