5 Components of a Successful Business: Understanding the Pyramid of Profit

The first principle of any business is to increase revenue and PROFIT. After all, it’s the reason we start a business in the first place. In an effort to survive and excel, whether in the short term or long into the future, focus must always be on increasing profits. Profit is the life blood of all business.
Regardless of the business type, owners and managers must understand the Pyramid of Profit and how its components directly affect the success, or failure, of a company. The Pyramid of Profit is made of five components: People, Product, Price, Plan, and Promotion. The crowning achievement of the successful application of these five is PROFIT. Let’s examine how the Pyramid works.
The first step is the base of the pyramid, and it’s the largest step in building the structure. It has been said many times that with the right people you can achieve anything. People, the right people, properly trained, motivated and managed are the key determinate. A business needs a certain number of employees. This does not mean an overabundance of people in every area. Keep in mind that the largest category on your annual operating budget is Employees and Related Expenses. Unfortunately, this is the one budget item that most employers decide to cut immediately in order to increase profit. There are many instances that this may not be the right decision to make. Before reducing the workforce, try to determine if you have the right people doing the right job. After your evaluation, you may find out that you do not yet have all the right people. Changes may have to be made so that you will not have to reduce the size of the employee base, but you may instead have to look for more of the right person you need in certain areas.
Let’s take a look at recent history. When the President/CEO of one of the largest U.S. automakers resigned his position, one would have assumed that the Board of Directors, in their search for a replacement, would hire from within the auto industry. They did NOT. The Board selected the right person from outside the auto industry and hired the President from IBM. Here comes a person who did not have any experience in the auto industry, but, the Board determined that he was the right person to lead their company and that’s all that mattered. Whatever knowledge and experience he may have been lacking would have to be learned quickly, but he was hired even though he was on a learning curve when he joined. This same man, now in charge of this large U.S. automaker, was the only President/CEO who did NOT need any bailout stimulus funds when the economy suffered its great loss in 2008. Today, and every quarter since his joining the company, he has shown a profit and has expanded the company’s financial resources. He is the RIGHT person for the job. People are the first and most important component in the Pyramid of Profit.
The second step, somewhat smaller than the first in the building of your pyramid, is to look closely at the current Product (or Service) you are managing. You may find that you need to add products or services to your current lineup, while complementing the base product/service line that you presently offer. During the 70’s and 80’s there was an explosion of company mergers and acquisitions of other companies not related in any way to the acquiring company’s products or services. Many of these acquisitions failed quickly due to the vast differences in people and products between the two.
In looking at your current product/service line, you may find something very alarming. You are doing far too much to be profitable. This was very true just recently in one of the world’s largest businesses, the auto industry. After an in-depth review of the automakers product line, it was discovered that in order to survive and to sustain profitability, several models had to be discontinued forever. Many models we all grew up seeing and driving are no longer manufactured. This was true with almost ALL automakers worldwide. As an industry, they offered too many products, too many choices and no profit as a result. When the product line was reduced and refocused, some automakers returned to record sales and record profits. Lessons learned. There are companies who offer too many products, too many services and now are struggling to create a profit or even sustain themselves. Take a close look, a very close evaluation of your current product line and determine if products need to be added or are there some that need to be discontinued completely.
The third step in the building of the Pyramid of Profit is Price. Is the price of your products in line with the consumer’s purchasing habits? To determine this, take a close look at the sales of each of your products. Are there any that are lagging far behind, perhaps even at a loss? Are there products in your present line that are very expensive to produce or to deliver to the buyer and, therefore, must be priced higher than usual in an effort to show an acceptable profit on that specific product? Should you keep this product in your product line? Here we are again. Do we eliminate this product and go forward? Do we replace this specific product with another and integrate it into our current line? If so, will it be lower in price and be even more affordable to the consumer? Recently, one of the largest fast food chains did just that. They eliminated a number of items in their line and reduced the cost of some others in an effort to increase sales. There are many times a company would be wise to reduce prices and increase sales, increasing revenues and in the end increasing profit. Many companies view this as a risk, but, the vast majority of companies who have adjusted their prices have increased their total revenue and increased profits because of an increase in volume.
One the world’s largest retailers has built their empire on having “low prices, Everyday.” This organization goes all-in on increased volume in every department. The profit margin is smaller than their competitors’, but, it is volume that keeps them on top in the retail world. Here again, there is a lesson in this success story.
The next step in the pyramid is Plan. Do you have a well-thought out, well-designed business plan that you change, update and modify, as necessary, during the year? Do you construct a new plan for next year? Yes, this takes time and effort, and whether you are a small organization or a fortune 500 company, most do not have such a business plan that is worked on throughout the year and redone going into the following New Year. There is a corporate and business mindset that says if everything seems to be going along o.k., there is no need to make changes or modifications. In short, “if it ain’t broke, don’t fix it.” When a corporate or business disaster comes along, which it usually does, it may be too late to come up with a plan. You’ll be in disaster mode and will not have spent any time working on prevention early on. So, when things happen that cause a serious shift in your business, you’ll find yourself unprepared and in a panic.
Plans should be prepared during the last quarter of each year, giving all who need to have input the time to present and discuss new activities, new changes, and new ideas for the upcoming year. After the New Year begins, the plan should be reviewed every quarter going forward so that any necessary changes or modifications can be implemented effectively and efficiently.
If you (your business) don’t know where you’re going, then any road you’re on will get you there. A Plan is your “road map,” which can and will give you directions on how to get where you want the company to go.
Promotion is the last step in the Pyramid of Profit and it is as equally important as the first four steps. Simply stated, promotion of your products or services is marketing and advertising.
Here again, when things are slow and the overall economy is sluggish, most organizations cut back on promotion. Suggestion: When things are as they are in today’s economy, more promotion is necessary to keep your organization on at least the same level as you were before the economy became so sluggish. Why? Cutting back on promotion of your products/services has you disappearing from view. In any successful and productive marketing & advertising campaign, there are 2 rules of thumb: frequency and recency. When was the last time anyone saw or heard your promotion? How often during this week or this month did they see or hear any promotion of your products or services?
Promoting products and the marketing of services should be done utilizing a supported marketing plan. Example: running one ad once or twice, no matter its size, will yield insignificant results because there is no application of the frequency or recency principle. Running a print ad every week for a month while also doing some direct mail promotions will yield better results, but, it is still not very effective, especially in a suffering economy. In a struggling economy, it is crucial for you to at least maintain and try to increase your market presence. When the economy rebounds, as it will, you will be recognized for having survived the downturn and being an agent of growth and expansion in your market.
A fully supported marketing plan that will yield the greatest result in any economy is to utilize print media (newspaper, magazines, and periodicals), broadcast (radio), direct mail, electronic media (TV, web) and take-ones (flyers) at your business location. The plan should incorporate all of these elements throughout each month in a rotation fashion, with as much frequency and recency as financially possible.
In conclusion, when you find the right people for your organization, identify the proper products or services to sell, price your wares properly for the market, develop and adapt your plan for growth and promote your business, your end result will be a profitable one.