Editor's Guide: The business element of the profit model, whether it is a domestic giant company or many start-up companies, is unavoidable and needs to be fully considered in the early stage. It's also one of the elements that any company needs to think about when considering a business model. The author of this article analyzes the profit model in a visual way, hoping to help you.
We know that business models involve value creation, value transmission and value acquisition. Among them, the acquisition of value refers to how enterprises obtain benefits through products, which is the topic to be talked about today - profit model.
The business element of the profit model, whether it is a domestic giant company or many start-up companies, is unavoidable and needs to be fully considered in the early stage. It's also one of the elements that any company needs to think about when considering a business model.
When analyzing the profit model of competitors or their own products, product managers often appear to be chaotic and irregular, or one-sided and incomplete, and there is no systematic consideration for the various stakeholders involved in the product. Today, I hope that through visual methods, we can help you sort out the composition of the profit model and decompose the profit model one by one.
First, what is the profit model
The so-called profit can be understood by a simple mathematical formula, that is, profit = income - expenditure. Then the profit model is to consider the income and expenditure of the product, including the source of income and expenditure, the way of income and expenditure.
We can compare the nine elements of the current popular business model canvas, of which the two major elements of revenue source and cost structure can be compared with the two parts of income and expenditure here.
It can be seen that the profit model is a meticulous analysis of the flow of funds under the framework of the business model, and at the same time, the business model is not equal to the profit model, and the relationship between them is contained and included.
Second, why should we consider the profit model
When we develop products, can we not consider the profit model first? Some product managers feel that companies can develop products first, and when the products mature and there are more users, it is not too late to consider the profit model.
This view is false and risky. Any product, when creating value for users, must consider how to obtain value. If it's just about providing value to the user, it's probably a public good product rather than the commercial product we're talking about.
2.1 A good profit model is conducive to maintaining the long-term development of the enterprise
From the mathematical formula of profitability, it can be seen that the essence of the company considering the profit model is to pursue profit. The maintenance and development of enterprises are inseparable from funds, and without funds, it is a passive water, just like building a castle on the beach.
For example, in the early days of QQ, although it has a large number of users, the larger the number of users, the higher the cost of investment, and the acquisition of profits is delayed in the future, so that Ma Huateng almost bought QQ at a low price that year, if it were not for the serendipitous acquisition of investment, as well as the construction of profitable methods such as emoticons and games, perhaps everyone would not see the current QQ and WeChat.
Therefore, the profit model must be fully considered in the early stage, which can be a simple closed loop, waiting for continuous optimization and adjustment in the later stage, but cannot blindly ignore the profit model in the early stage.
2.2 Good profit model, effectively judge the value of products
To quote an economic view: commodity producers produce goods for exchange value, not for use value; consumers of goods for use value. Only through exchange can the contradiction between the use value of commodities and the exchange value be resolved.
In the same way, enterprises develop products because the product can meet the needs of users, but enterprises do not only want to meet the needs of users, but also need to obtain the value of enterprises from users at the same time. If the product does not motivate users to pay for the value of its product, it is possible that the value of the product does not meet the needs of the user, or the solution to meet the needs of the user is not optimal.
There is a well-known MVP theory in the product, that is, the minimum simplified and implementable product, through a simple product closed loop, to test the market value of the product. Whether the user will pay for it is a very important key point, and it is also a measure of whether the product will be developed in the later stage.
Therefore, if the profit model is not considered in the early stage, whether the product has value is doubtful and needs to be marked with a big question mark.
Third, how to visually analyze the profit model
Common words or language are difficult to describe clear profit models, and it is easy to lose sight of one or the other. If financing is to be considered later, it is necessary to visualize the profit model in a visual way.
Visual analysis refers to visually presenting the competitiveness of the profit model through drawings and other forms. Here, the income and expenditure methods and revenue and expenditure sources are mainly analyzed through the income and expenditure mode diagram and the pm chart of the source of income and expenditure.
3.1 Chart of Income and Expenditure Methods
The so-called income and expenditure method diagram is a way to show income and expenditure in the form of a chart.
There are mainly the following ways to earn income:
- Once: a one-time fee is charged when purchasing, a hammer transaction, such as the purchase of An Apple mobile phone;
- Metering: Charged according to the amount of use, the water and electricity bills in our lives are so;
- Timing: Charged according to the time of use, when we rent a house, we collect rent according to the time of occupancy on a monthly or quarterly basis;
- Counting: first pay and then deduct according to the number of uses, such as the membership coupon of a café, how many times can you order coffee for free per month;
- Sharing: share with customers, share after-sales profits, various intermediary services in life;
- Free: Offer the core product or service for free.
There are several main ways to spend:
- Fixed: fixed expenditure expenses, that is, regular operating expenses, including technical maintenance, personnel salaries, etc.;
- Share: share the expenditure, if it is cooperated with a third party, it needs to be divided into expenditure according to a certain proportion;
- Other: In addition to the above two, other expenses.
Therefore, we divide the income and expenditure chart into two parts, the horizontal axis is the expenditure on the left and the income on the right. The vertical axis can be roughly divided into the timing of income and expenditure: immediate, monthly, quarterly, and annual, and the time span here is subject to the actual product.
3.2 PM chart of revenue and expenditure sources
The PM chart of revenue and expenditure sources is a way to visually show the competitiveness of the profit model, and each PM number corresponds to a display of revenue and expenditure sources.
The horizontal axis is the source of income, divided into direct customers, direct customers and third-party customers, third-party customers; the vertical axis is cost payment, divided into enterprises, enterprises and third partners, third partners, zero variable costs.
By dividing the horizontal and vertical axes, it can be divided into 12 common patterns. P is the profit, which is the profit; M is the model, which is the model.
PM0: The cost is borne by the enterprise, and the income comes from direct customers, more common manufacturing products such as clothes, shoes and hats.
PM1: The cost is borne by the business, and the income comes from direct customers and third-party customers, such as newspapers published by newspapers, and the income comes from readers and advertisers.
PM2: The cost is borne by the enterprise, and the revenue comes from third-party customers, which is commonly a traffic-based product in the Internet, with online advertising as revenue.
PM3: Costs are shared between the company and third-party partners, and revenue comes from direct customers.
PM4: Costs are shared between the business and third-party partners, and revenue comes from direct and third-party customers. For example, there are multiple companies cooperating in film production, and the revenue comes from the box office and implanted advertising
PM5: Costs are shared between the business and third-party partners, and revenue comes from third-party customers. Many of the various variety shows on TV have local satellite TV participating in the investment, and the income comes from the advertisements implanted in the programs.
PM6: Costs are borne by third-party partners and revenue is derived from direct customers. In a paid knowledge product, the platform bears the cost, while the source of revenue is direct to the purchaser.
PM7: Costs are borne by third-party partners and revenue is derived from direct customers as well as third-party customers. For example, in Himalaya FM, the cost of audio content is borne by a third party, and the revenue comes from user payment and advertising revenue.
PM8: Costs are borne by third-party partners and revenue is derived from third-party customers.
PM9: The cost is zero variable cost (the marginal cost is zero), the new cost of each new user, or a new service for each user, is close to zero, and the revenue comes from direct customers
PM10: Cost is zero variable cost (zero marginal cost), most companies attract a large number of users by providing free goods or services, relying on customers who need better services/goods to pay extra, and free goods/services are embedded in third-party advertising.
PM11: Cost is zero variable cost (marginal cost is zero) and revenue is derived entirely from third parties. For example, Google Search, where users search for information for free, businesses charge third parties from advertisements displayed.
In summary, through the two charts, you can clearly express the profit model, that is, what is the way of income and expenditure, and who provides income and expenditure. When we consider the profit model, we can first consider the income, and then consider the expenditure, compare the proportion of income and expenditure funds, and measure whether the profit can be realized.
In the early stage, we can have a general direction for the profit model of the product, and in the later optimization and practice, we can continuously improve these two charts.
The discussion of visual analysis of profit models ends here, and we can operate these learned knowledge in practical work, whether it is the consideration of the profit model of our own products or the exploration of the profit model of competitors.
This article was originally published by @Fengming on the premise that everyone is a product manager, and reproduction without permission is prohibited.
The title image is from Pexels, based on the CC0 protocol