If you’re in business or management you need to understand the profit model of the organization you work for. A profit model is simply how the business makes money. There are several elements of your profit model you need to clearly understand to be able to make decent profits in any business.

  1. Production. You need to understand how your product or service is made and the costs involved. You have to determine the cost of making your product or service. Without this knowledge you’re operating in the dark.
  2. Sales and marketing. You need to understand the person you’re selling to and how best to reach them. Without the right customers your business won’t scale.
  3. Distribution. You have to establish the most optimal way to deliver or distribute your products or services. You have to know your distribution costs for each channel.
  4. Pricing. The pricing for your products and services is critical. The price you charge should be able to recover your production costs, distribution costs, and overheads.
  5. Profit scenarios. Different profit scenarios should be mapped out for different levels of production. The target production/sales level chosen is the one which generates sufficient profit for the business owner at a given level of capital deployment. If you’re able to you should should develop your profit model in a spreadsheet and change different variables to see the effect on profits.

Having a clear profit model will greatly improve your chances of success in business.

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