Tuesday, September 12, 2017

Review of The Art of Profitability by Adrian Slywotzky (Chapter 2)

See our reviews of Chapters One and Four of The Art of Profitability. The model in Chapter Two is "Pyramid Profit":

"Here's how it works at Mattel. You sell a Barbie doll for twenty to thirty dollars. But imitators can come in below you. So you build a firewall. You develop a ten-dollar Batbie to seal off that space. It's barely profitable, but it prevents other companies from establishing a connection with your customers. [...] But in order to achieve a real breakthrough, Mattel had to look in the other direction. Looking hard, they saw the opportunity for a $100 or $200 Barbie. [...] Suddenly, Barbie wasn't a product any longer, but a system... a firewall of defensive product at the bottom of the pyramid and powerful profit-generators at the top."
A company sells a set of products with escalating prices and margins but narrowing audiences; hence the pyramid. The firewall item brings customers into the system, some of which flow through the sales funnel over time and buy the much more profitable products at the top of the pyramid.

The best historical example of this strategy is when Alfred Sloan ran General Motors and segmented the car market into five brands: Chevrolet, Pontiac, Buick, Oldsmobile, and Cadillac. This was called the "ladder of success". It's been copied successfully throughout the car industry - all of the Japanese auto manufacturers have a pyramid model.

At first it seems like pyramid profit is a business to consumer model, where the profit is coming from aspirational, high margin, status symbol goods at the tops of pyramids. Certainly there are many more such examples: Tiffany's sells cheap lockets and such for teenage girls, clothing makers like Ralph Lauren sell clothes under several different labels with different levels of exclusivity.

Can a business to business product be sold under a pyramid profit model? Here is one venture capitalist who thinks so.
"Many SaaS businesses follow this profit model: there's a free/cheap tier, a medium priced tier that is appropriate to most customers, and an enterprise tier for customers with deep pockets who want the most features and services."
Pyramid profit models seem much more common than switchboard profit models, that's for sure. However if you are selling enterprise SaaS software to customers with deep pockets, odds are you are probably doing a little customization and therefore customer solution profit as well.


CP said...

It wouldn't be a great strategy if it wasn't possible for someone who didn't understand it to screw it up:

GM brands would be staggered in price and prestige in such a manner that, over a lifetime, customers could rise through the marques as their fortunes improved.

Thus, young and family-oriented shoppers might enter the General Motors family via the Chevrolet or Pontiac brands. As their careers advanced they might upgrade to an Oldsmobile or Buick, and, given sufficient financial success, eventually step up to a Cadillac.

A key tenet of Sloan’s plan was to keep each brand distinct in terms of styling, content, and price–this to avoid inter-divisional competition for the same customers.

Today, a couple of rungs have been removed from Sloan’s ladder. The Oldsmobile brand was laid to rest after the 2004 model year, and Pontiac followed in 2009. But the breakdown of the ladder concept began long before then.

By the end of the Seventies, General Motors had earned a reputation for “badge engineering.” A pejorative term applied to a number of GM model lines, badge engineering was the process of building one car and only lightly modifying it for different brands.

From: http://blog.consumerguide.com/ladder-to-oblivion-the-1982-general-motors-j-cars/

bjdubbs said...

Immortalized by the Cadillac Cimmaron, which was a rebadged Chevy Cavalier. This book is great but I also tried to read his textbook version of the same material and it was unreadable. The detective story/grasshopper gimmich is a little cheesy but very effective.