Chapter 3

Profit Model

How You Make Money

Innovative profit models find a fresh way to convert a firm’s offerings and other sources of value into cash. Great ones reflect a deep understanding of what customers and users actually cherish and where new revenue or pricing opportunities might lie. Innovative profit models often challenge an industry’s tired old assumptions about what to offer, what to charge, or how to collect revenues. This is a big part of their power: in most industries the dominant profit model often goes unquestioned for decades.

Common examples of profit model innovations include premium prices, where companies figure out how to charge more for their offering than competitors do, or auctions, where the market sets the price for goods. The ideal profit model will vary widely by context and industry. A new entrant may design its profit model to make it easy for customers to try and adopt its products (say, metered use), while the incumbent may counter with models that make it difficult for existing customers to switch (say, subscriptions). One constant: to succeed, profit models—perhaps more than any other type of innovation—must align with a company’s overarching strategy and innovation intent.

If you work for a non-profit or governmental agency, you might feel that this type of innovation clearly doesn’t apply to you. It does, but the terminology may need a tweak or two. Perhaps you might think of it instead as a “value model,” or how you sustain your organization ...

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