Strategic Planning: How Do You Make Money?
Understanding where your income comes in is critical to your strategic plan. If someone asked you how your organization makes money, more than likely you’d reply by explaining the types and number of products or services you sell. Although that answer is technically correct, look instead at your revenue generation from a different perspective. For the moment, resist looking at your income statement. No peeking.
Instead of looking at the old income statements, you’re going to gain new insight into what really drives your profit. Think about your revenue in terms of profit per X. Here are some examples:
Profit per customer or client
Profit per customer visit
Profit per employee
Profit per household
Profit per product or service
Profit per product or service line
Profit per region
Profit per billable hour
You may be tempted to look at this list and decide that several of these examples are your profit engines. The challenge, however, is to determine which one is actually the best revenue driver for your business. That’s to say, they may all bring money into the business, but one will have the biggest impact.
Looking at your revenue generation from this perspective is just like panning for gold. You don’t need to change your activities, but you may need to look at your pan from a different angle to see the nugget.
Your profit engine is unique to your business. The following list of attributes makes up a good profit engine. Use this list as well as the previous examples to identify yours.
Broad measure: A good profit engine is broader than a typical financial metric, such as number of products sold or number of customers per day. An example of a broad measure profit engine is selling the best family-style meal in Lakeside at a profit.
Customer focused: A profit engine should add to the customer experience and increase your customer focus. For example, by looking at your services from your customers’ eyes, you may realize that instead of profit per product or service, your profit engine is profit per customer.
Improves resource sharing: You only have so much time, money, and resources. If you can share your resources, you’re increasing their use and your company’s output.
For example, a consultant only has so many hours in the day. Instead of looking at profit per hour, she can look at profit per client. Even further, if this consultant has a special methodology she uses in her consulting, her profit engine may be profit per number of uses (books, speaking, training other consultants, licensing, and so on).
How does identifying your profit engine relate to uncovering your competitive advantages? Understanding what drives profitability in your organization helps you to pull out what’s really a competitive advantage and what’s just nice to have.
As you evaluate your business, consider what one measure drives your revenue. The example in the figure can help you to develop your top three possible profit engines and evaluate them against the criteria provided. Select the profit engine that best meets all three criteria.