by Kenneth Jackson

Executive Summary

The Art of Profitability, by Adrian Slywotzky is an incredible book that describes and teaches the various methods to make a profit in whatever business or economic condition one might be in at that time.  He does this by telling a story of a man named David Zhao who is teaching his apprentice Steve Gardner the various profit models, twenty-three to be exact. That is how the book is broken up, twenty-three chapters or “lessons” on the profit models.  Here are some examples of the different profit models discussed.

            In lesson one, the first model discussed between Zhao and Steve is “Customer Solution Profit”.  This showed how one must, “Invest time and energy in learning all there is to know about your customers. Then use that knowledge to create specific solutions for them.  Lose money for a short time.  Make money for a long time.”  For example, by sending people of your own company to work at your customers in order to figure out how their company is run.  By doing this, you would have to invest your time, money, and resources but in the end it would pay off.  Once you have customized your services to fit the customers’ needs, you will start seeing an increase in your own profits.  Another positive about this book, Zhao would draw graphs showing the effect of the model on the profit curve over time.  This makes it very easy for the reader to understand the model by just looking at a graph.

            In lesson two, the discussion between Zhao and his apprentice move onto “Pyramid Profit”.  They explain how by setting different price levels on your product would help increase your profit and keep competitors off your back.  By pricing the product higher on each step up on the pyramid you can add features that meet the needs of a variety of customers.  This model allows you to spread your customer base and set your base products price low enough so that your competitors can’t undercut you in price.  The author states that, “A true pyramid is a system in which the lower-priced products are manufactured and sold with so much efficiency that it’s virtually impossible for a competitor to steal market share by under pricing you.”

            In lesson three, the topic discussed between Zhao and Steve is “Multi-Component Profit”.  Multi-component profit is basically taking the same product and selling it in a variety of different ways.  The example used in the book is coke.  Coke is sold in two-liters, as a fountain drink, and out of vending machines in a can or bottle.  By selling the same product in different ways and at different price points gives you the best odds of making the most profit out of your product.

The seventh lesson taught by Zhao is the “Profit-Multiplier Model”.  This model takes a single skill, asset, or intellectual property and multiplies it into many different forms of profit.  The author uses Honda as an example.  Hondas’ skill is making motors and they multiplied that into many different forms, by making motors for cars, motorcycles, lawnmowers, boats, and more.  They maximized their profit by creating different products based off their original skill.  By doing this you are able to save on your research and development cost, which adds to your profit.

In The Art of Profitability, there are twenty-three profit models discussed, there are many more.  They are the main ones that set the ground for profit models. This is a summary and review of what I took from and learned after reading The Art of Profitability by Adrian Slywotzky, but don’t take my word for it, read it for yourself!

The Ten Things Managers Need to Know fromThe Art of Profitability

1.            I believe there are twenty-three things managers need to know from this book because every profit model is important in its own way.

2.            Many of the profit models cross paths and seem very similar but it’s the little differences in them that make them so different.

3.            Know what profit model your business is run on so that you can make the most profit possible.

4.            In some models you are always trying to cut costs but in others you are investing all you can and taking the most risk, so know where your business falls in between these two extremes.

5.            To make a profit takes time, so don’t think as soon as you start using the model you will be successful. 

6.            As long as you stay with the model and follow it over time there is a profit to be gained.

7.            No matter the size of your business there is always a profit to be made.

8.            If your company is the one leading the industry, you are able to set the ground rules.

9.            Some company’s gain from using two or more of these models at the same time.  That’s why it is important to know them all in order to maximize your profits.

10.            Even in a recession, you are able to stay ahead of competitors.

Full Summary of The Art of Profitability

The Art of Profitability, by Adrian Slywotzky is an incredible book that describes and teaches the various methods to make a profit in whatever business or economic condition one might be in at that time.  He does this by telling a story of a man named David Zhao who is teaching his apprentice Steve Gardner the various profit models, twenty-three to be exact. That is how the book is broken up, twenty-three chapters or “lessons” on the profit models.

            In lesson one, the first model discussed between Zhao and Steve is “Customer Solution Profit”.  This showed how one must, “Invest time and energy in learning all there is to know about your customers. Then use that knowledge to create specific solutions for them.  Lose money for a short time.  Make money for a long time.”  For example, by sending people of your own company to work at your customers in order to figure out how their company is run.  By doing this, you would have to invest your time, money, and resources but in the end it would pay off.  Once you have customized your services to fit the customers’ needs, you will start seeing an increase in your own profits.  Another positive about this book, Zhao would draw graphs showing the effect of the model on the profit curve over time.  This makes it very easy for the reader to understand the model by just looking at a graph.

            In lesson two, the discussion between Zhao and his apprentice move onto “Pyramid Profit”.  They explain how by setting different price levels on your product would help increase your profit and keep competitors off your back.  By pricing the product higher on each step up on the pyramid you can add features that meet the needs of a variety of customers.  This model allows you to spread your customer base and set your base products price low enough so that your competitors can’t undercut you in price.  The author states that, “A true pyramid is a system in which the lower-priced products are manufactured and sold with so much efficiency that it’s virtually impossible for a competitor to steal market share by under pricing you.”

            In lesson three, the topic discussed between Zhao and Steve is “Multi-Component Profit”.  Multi-component profit is basically taking the same product and selling it in a variety of different ways.  The example used in the book is coke.  Coke is sold in two-liters, as a fountain drink, and out of vending machines in a can or bottle.  By selling the same product in different ways and at different price points gives you the best odds of making the most profit out of your product.

The forth lesson discussed is “Switchboard Profit”.  This one is a very basic concept.  The author states, “The more critical mass you build, the higher your probability of putting together a package that works.”  This is the basic idea behind switchboard profit.  By controlling and having deals with all facets of you business that represents the best of their divisions will allow you to control the price because you will by controlling the majority of the market.  If you are controlling the majority of the market, “the deals all begin flowing in your direction.”

“Time Profit” is the fifth lesson that is discussed in The Art of Profitability.  This model describes how the time on the market plays a role on the profit make on the product or idea.  Many times when a product comes out, copy-cats jump at another’s idea and shortly after they are selling knock-off versions of the original.  In order to maximize the sale of your original item, “they needed instant diffusion—a faster way to squeeze out the juice before everybody else learned the secret.”  Zhao and Steve discussed how this is done, by sending a letter to you clients before your announce the new product.  Then contact them on the phone notifying them of the availability and release dates.  Finally, training your staff on the product, so they have full knowledge and are able to answer any questions thrown at them.  This is how you can gain the maximum time on the market and make maximum profitability on your product or idea. 

In the sixth lesson they discuss the topic of “Blockbuster Profit”.  Blockbuster profit is a lot what it sounds like, trying to find that one big idea.  You should focus all your resources into the important projects and ideas.  Some of these will fail but eventually you will get one that takes off.  Then once it does you concentrate on getting the most profit you can out of it, in order to put back into research for other new ideas.  There is nothing easy or definite about this model, like the author says, “The blockbuster model is a mind game.  It takes huge confidence to aim high, to deliberately set out to build the next great blockbuster.”

The seventh lesson taught by Zhao is the “Profit-Multiplier Model”.  This model takes a single skill, asset, or intellectual property and multiplies it into many different forms of profit.  The author uses Honda as an example.  Hondas’ skill is making motors and they multiplied that into many different forms, by making motors for cars, motorcycles, lawnmowers, boats, and more.  They maximized their profit by creating different products based off their original skill.  By doing this you are able to save on your research and development cost, which adds to your profit.

Lesson eight in The Art of Profitability covers “Entrepreneurial Profit”.  This lesson shows how one can achieve entrepreneurial profit through super-frugality, clear communication, speed, experimentation, and fun.  For example, to save money fly coach, stay in cheaper hotels, and use the phone for as many conferences as possible instead of flying.  You should also make your goals very clear and reward those who perform the best.  This model also calls for experimenting.  If the experiment fails, get out quickly, but if it works, put everything into it.  This helps keep the employees interested and engaged in the work they are doing.

In lesson nine, Zhao and Steve discuss “Specialist Profits”.  By focusing on one discipline and specializing in it will increase your profits.  If you are a specialist, more talented people would want to work for you, “Therefore better quality, better cost, better ability to sell follow-on business.”  This in exchange will affect the pricing of your products.  For example, if you want to build a house, you do not go to a trim carpenter and get him to build the house.  You would want a guy that specializes in building houses.  By being this specialist you are able to get more business, get cheaper supplies, and attract people with talent to work for you.  At the same time people are willing to pay you more because you know exactly what to do.

The tenth lesson taught is “Installed Base Profit”.  After the customer makes the initial purchase, they have to make other purchases of the sellers’ consumables in order to keep their product up to date and working properly.  This is where the power switches to us, “In the original sale, the buyer had it…lots of choices.  In the after-sale, the seller has it because the buyer is locked into the seller’s consumables.”  Air-conditioning units is an example talked about in the book, once one is sold, you have to buy filters and have maintenance preformed on them. 

The eleventh lesson to be learned is “De Facto Standard Profit”.  To sum this model up, by being on the cutting edge of your industry, it causes competitors to scramble to catch up, costing them money.  In addition, it allows you to save on marketing.  The author states, “The owners of the de facto standard can plan and can shape the next stage of the industry’s unfolding landscape, because it’s their business plan that drives it.”  By leading the market your products are spread by word of mouth saving you on marketing.

Lesson twelve discusses “Brand Profit”.  This model is just what it sounds like; by creating a brand name in your industry you can increase your profits.  But first, in order to make a brand name you must study successful company’s business models, meet the consumers needs/wants, and have effective marketing.  By creating a brand name you are able to set the highest prices and make the most profit.  Some examples are, “Coke. Marlboro. Budweiser. Swatch. McDonald’s. Nike.”  These all show how important business models, marketing and meeting the consumers needs/wants really are when trying to establish a brand name.

 Lesson thirteen discusses “Specialty Product Profit”.  The author states, “The key is finding a legitimate need or variation and addressing it.”  Specialty product profit requires you to find a special niche that is demanded for and supply the consumer with that need.  This model is a lot harder to develop and requires mainly research to find that niche.  This model has decreased over the years and it is mainly commodity items being purchased over specialty items.  Although there are still some specialty products out there, but to find them one must, “think fine chemicals, think dyestuffs, think specialty papers, think specialty foods.” 

Lesson fourteen discusses the model of “Local Leadership Profit”.  This profit model shows that by having a large number of locations in a single city at a time will boost your profits.  By having many locations, you will take away prime locations from your competitors increasing your customer base and reducing the advertising costs of you company.  While at the same time this allows you to charge a premium for your product.   The best example they use is Starbucks, with their many locations they are the perfect example of this profit model.  This model can also be used country wide.  An example used of this is Wal-Mart.  They set up locations throughout the country then saturate it with stores.

In lesson fifteen, “Transaction Scale Profit” is discussed.  The author states, “Big transactions meant bigger profit, that cost per unit rose more slowly than revenue per unit the bigger the deal became.”  Taking the risk of going after only the dig deals with all your resources can pay off in the end.  The example used of this is real estate.  By investing your resources and money in going after the big deals, you may only sell a few houses a year but your commission on those few would be greater than the commission on selling many small houses. 

“Value Chain Position Profit” if the model discussed in lesson sixteen.  This model is exactly what it sounds like, the author states the there are “Places in the value chain, that are ten times more valuable then others in terms of profit, power, and control.”  This can be seen in Nike, the marketer and designer are the ones in the value chain that hold the power.  If you are able to recognize and capitalize on the bottleneck in a company you will be able to maximize your profits.

Lesson Seventeen discusses the model of “Cycle Profit”.  As utilization increases, costs decrease and price increases.  In this case you will make a profit.  When utilization decreases you will be loosing money because your costs will be higher than your price.  In order to stay ahead of competitors, you must bring down your break even point by reducing costs.  Toyota is the example used for this.  By reducing their fixed costs and lowering their breakeven point, “when others lose money, they break even.  When others break even, they make money.”  There profits will stay ahead of their competitors whether the economy is doing good or bad.

“After-Sale Profit” is the profit model discusses in lesson eighteen.  When selling high price items, “they should be expanding their scope to include a full-court press on the after-sale stuff to the original sale product, so that the customer has a compelling reason to buy the after-sale items and services from them.”  This will help maximize their profits.  On the other hand if they do not do this, other companies will recognize this gap and be able to capitalize on it.

Lesson nineteen discusses “New Product Profit”.  This model discusses how there is a limited time to capitalize on the profit of a new product.  When a product first arrives on the market there is a boom in sales because everyone wants that item.  This is the time you want to merchandise, build plants, and make deals.  But then when you realize you are going to be reaching the peak of the growth rate, start selling some of you plants to the latecomers.  Then with all of the profit you gave gained start searching and investing in that next new product so you catch it on the rising side of the profit curve.  The author states “Get off the last wave first, catch the next wave first.” 

The next model discussed is “Relative Market Share Profit” in lesson twenty.  The author states, “The higher the RMS, the higher the profit.”  By investing and building the largest market share you will maximize your profit.  The author says this profit can be gained because the biggest company pays the lowest price, lowest unit cost, and lowest marketing costs.  Being the largest company will also attract the best talent.  This company is the least volatile and is able to outspend competitors in any area of the business.

Lesson twenty-one in The Art of Profitability covers the “Experience Curve Profit”.  The author states, “It’s all about using experience to bring down costs faster than competitors do.”  This is a simple profit model, by using your experience to cut costs, such as fixed costs, faster than any others will increase your profits.  It is basically a race based on experience and whoever cuts costs the fastest wins. 

Lesson twenty-two discusses “Low-Cost Business Design Profit”.  This profit model “is hugely profitable as long as it continues to be dramatically lower-cost.”  By keeping the costs low you are able to gain the most profit out of your business.  Many of the profit models cross paths with each other and many of them relate back to the low-cost business design profit. 

The final lesson discussed in The Art of Profitability is lesson twenty-three, “Digital Profit”.  This model is about being digital or having an internet based company.  By following this model, “you can be hugely successful without being huge.”  You save on a huge amount of costs by having an internet based company.  For example, you save on customer interaction costs and customers can design your products to their specification saving you production costs.  In addition, many of their questions can be answered by the other customers on your site.  These are only some of the ways to gain a digital profit.

These are the twenty-three profit models discussed in The Art of Profitability, there are many more.  They are the main ones that set the ground for profit models. This is a summary and review of what I took from and learned after reading The Art of Profitability by Adrian Slywotzky, but don’t take my word for it, read it for yourself!

Personal Insights

Why I think:

With business conditions today, what the author wrote is – or is no longer true – because:

What the author wrote is true and can be used in business conditions today.  The author has profit models for every type of business and that can be used in any economic condition.  So when even in a recession, like today’s business conditions, you are able to make a profit or at least stay ahead of the competition. This can be done by using the cycle profit model, by cutting costs and changing your breakeven point, you are always one step ahead of your competitors. This is only one of the models; there are many more that can help your business.

If I were the author of the book, I would have done these three things differently:

1.            I would have spent more time discussing the differences between the models that cross paths and are similar to one another.

2.            I would have gone more in depth on how to apply these models into a business rather than talking about businesses that already have these models applied.

3.            I would have discussed more how a business can succeed from using multiple models at one time.

Reading this book made me think differently about the topic in these ways:

1.            I never realized how many different profit models there are in businesses.

2.            I didn’t realize how even the smallest differences in the models make the biggest differences when applied to a business.

3.            Time plays a large part in every profit model in a different way.

I’ll apply what I’ve learned in this book in my career by:

1.            I will find the profit model that fits my business and stick to it.

2.            I will keep costs low in order to gain the most profit.

3.            Even when in a recession, I know what to do to stay ahead of competitors.

Here is a sampling of what others have said about the book and its author:

There are many different reviews on this book and some of them differ, but over all I found more positive reviews than negative ones.  Here is an example of the different opinions on this book.  A reader stated on weread.com that, “If your job has anything to do with strategy, you must read this book.”  On the other hand, a reader named Li wrote that, “the author doesn’t go into more detail with some of his concepts, so what you’re left with is some vague idea of them…”  The only true way to know if you will like it is to read it for yourself.

Bibliography

Li,  (2004, April 6). Largely a Waste of time. Retrieved from

            http://www.amazon.com/Art-Profitability-Adrian-Slywotzky/product-

            reviews/0446692271/ref=cm_cr_pr_link_next_2?ie=UTF8&showViewpoint  

            s=0&pageNumber=2

Reader,  (2008, April 11). Reviews of the art of profitability. Retrieved from

            http://weread.com/reviews/0446692271/The+Art+of+Profitability/BOK-

            10469502-4

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Contact Info: To contact the author of this “Summary and Review of The Art of Profitability,” please email Justin.Tykol@selu.edu.  

Biography

David C. Wyld (dwyld.kwu@gmail.com) is the Robert Maurin Professor of Management at Southeastern Louisiana University in Hammond, Louisiana. He is a management consultant, researcher/writer, and executive educator. His blog, Wyld About Business, can be viewed at http://wyld-business.blogspot.com/. He also serves as the Director of the Reverse Auction Research Center (http://reverseauctionresearch.blogspot.com/), a hub of research and news in the expanding world of competitive bidding. Dr. Wyld also maintains compilations of works he has helped his students to turn into editorially-reviewed publications at the following sites:

Management Concepts (http://toptenmanagement.blogspot.com/)

Book Reviews (http://wyld-about-books.blogspot.com/) and

Travel and International Foods (http://wyld-about-food.blogspot.com/).                

select: More Performing Arts Articles