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Gain Staying Power from Proprietary Margin

Proprietary margin is the ability of your business model to make more money from the same customer than a competitor can make. You can accomplish this by

  • Getting the customer to pay more for a similar product of similar cost. A cup of Starbucks coffee doesn’t cost more than other coffees; it’s branded and marketed better to command better margin per sale.

  • Capitalizing on revenue streams your competitors can’t. In the early 2000s, Best Buy made 60 percent of its profit by selling extended warranties. The massive volume of warranty-friendly products Best Buy sold led to a significant revenue stream.

  • Being creative. Everyone wants a good deal when purchasing a car. This psychological need for a good deal drives where you shop and how much you’ll pay.

    When a car dealer sells you a car for “invoice,” the dealer still makes money. The automotive companies and car dealers have many alternative revenue sources — like extended warranties, loan rate markups, volume bonuses, dealer incentives, floor plan allowances, and dealer fees.

    The dealer PACK is an ingenious invention that auto dealers use to boost their margins. The dealer adds up the total cost of running the business — utilities, rent, advertising, secretaries, interest expense, sweeping the parking lot, prepping cars for sale — you name it. The dealer calls this the PACK cost.

    In accounting school they call this overhead. They divide this “cost” figure by the number of total cars they expect to sell that year and maybe add a little to it for “cushion.” The result, or the PACK, is the profit the dealer pays itself before determining sales commission (about $1,200–$1,600 per car). Hey, give them credit. PACK is an ingenious way to boost margins.

  • Having a leading brand and large volume. Tide is the #1 selling laundry detergent by sales dollars and gallons sold. Guess what the least expensive detergent to produce is? Yep, it’s Tide. Having an industry-leading brand and economies of scale in production leads to proprietary margin.

  • Using proprietary supplemental products. The connectors, iPhones, and iPads are unique to those products. Apple creates proprietary margin when users need to replace chargers and cables.

Don’t be discouraged if your business model doesn’t have proprietary revenue. The business models of Anheuser-Busch InBev (makers of Budweiser) and Miller Coors (makers of Coors and Miller Lite) are nearly identical. Neither of these brewers has proprietary revenue streams, but that didn’t stop InBev from earning profits of $7.96 billion in 2011 and Miller Coors from earning $4.9 billion the same year.

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