4 Variables That Determine a Successful Profit Formula

Mark W. Johnson is Chairman of Innosight, a strategic innovation consulting and investing company with offices in Massachusetts, Singapore, and India. He's also the author of an excellent book: Seizing the White Space:Business Model Innovation for Growth and Renewal.

He shared an hour of his time, wisdom, insight, resources on business model innovation as a recent guest on my radio show. You can listen here.

I asked him:

What are the 4 variables that determine a successful profit formula?

And he answered:

1. Revenue model
2. Cost structure
3. Margins
4. Resource velocity

This is not meant to be financial 101. I have pointed them out because I think they need to be thought about first and foremost.

A revenue model is how much money can be made in sales.

Cost structure is both direct and overhead costs.

Then I talk about margins and resource velocity meaning the speed by which inventory and assets and utilization happens to cover the cost structure.

The simplest example of these four variables is the retail industry. There was a business model innovation with the discounts stores. Traditional department stores marked up their inventory 40% and then they turned the inventory 3 times over the course of the year which equals 120% return.

Discount retailers changed the game. All they did was decided not to mark up their inventory as much. They turned their inventory faster through their system.

Thanks, Mark.

The questions for businesses today becomes:

• what's your example of these 4 variables?

• which one can you alter to seize the white space, create a new business model, and do to your industry what discount retailers did to the retail industry?

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