Divorce From Theory and Practice, Part III

The Profit Function

Air is a necessity of human life. In the world of never-ending change, profit, like air, is the only one thing that makes enterprise’s survival possible. Every profit-maximizing enterprise strives to maximize profit, because the higher the profit, the bigger the success. But what exactly is profit? Simply put, profit is revenue minus cost. Revenue equals price times quantity. Cost is composed of fixed and variable elements. Discount should be considered while setting prices. The general rule is that the closer the relationship, the higher the discount given. Quantity is threefold. First, it is the number of customer, or clientele for a product. This is related to segmentation or customer pyramid. Second, it is the number of product sold, or sales. This is related to up-selling and cross-selling. Third, it is the frequency of product purchased by customer. This is about repeat purchase, or database marketing. Acronyms mentioned earlier are simply tactics employed to either help improve the revenue side or lower the cost side of the profit function.

The critical success factors of enterprise according to the profit function are therefore the touchpoint experience that affects the number of customer, the number of product sold, the frequency of product sold. Once the revenue side of the profit function is on the right track, the cost side will take care of itself by optimizing operational effectiveness and efficiency. Success is about delivering quality quantity effectively, efficiently and consistently, and it can be expressed in a formula.

S = (EQ)2 x C

where S = Success
E2 = Effectiveness and Efficiency
Q2 = Quality and Quantity
C = Consistency

See Part I, Part II and Part IV.