27
1.10.1.2 Profit Formula
The profit formula articulates how an organization creates value for itself, and for its
shareholders/stakeholders. Its main components are (1) the revenue model, (2) the
cost structure, (3) the margins model, and (4) resource velocity (Johnson et al.
2008). Revenue models establish the price at a given volume of transactions to cover
overhead, fixed costs, and desired profit margins. Profit formulas also establish the
resource velocity at which the organization turns over assets to achieve adequate
returns. Profit formulas need to account for the customer’s willingness to pay.
Do not assume that business models and profit formulas are interchangeable. The
profit formula is an element of a business model.
Box 1.6 Hortifrut: Worldwide Leader in Berries Production
Hortifrut is a Chilean company and a global leader in the production and commercialization of blueberries. As the world’s second largest provider of berries, it enjoys a comfortable 25% of global market share of blueberries and
has sales in over 35 countries. Its value proposition can be summarized as
“berries for the world – every day.” That appeals to both wholesale customers
and retailers such as Carrefour, Walmart, and Costco, as it simplifies and
strengthens supply chains. At the same time, this value proposition enables
the company to capture attractive prices all year instead of facing periods
when prices drop because of excessive supply.
Box 1.7 Safaricom and M-Pesa: The Power of an Effective Value
Proposition
While experimenting with diverse business models to develop a micro-loan
business in Kenya, the telecom firm Safaricom found a much more compelling value proposition: a cheap, safe, and reliable system to send money by
mobile phone to friends and family in rural areas. This insight became the key
value proposition of M-Pesa (M for Mobile, Pesa for money in Swahili).
M-Pesa is a branchless banking system that allows customers to pay bills,
deposit, withdraw, transfer, and save money in a virtual account. In some markets, like Kenya, users can use a mobile phone to transfer money between the
service and a bank account. As of 2018, Safaricom reported more than 28
million M-Pesa users and over 155,000 M-Pesa agents in Kenya. There are
over 10 million active users in countries other than Kenya.
From its humble beginnings in 2007, M-Pesa has become a huge economic
player in Kenya: it processes over 1.7 billion transactions a year, accounting
for more than 50% of Kenya’s GDP value.
1 The Quest for Innovation: Addressing User Needs and Value Creation
1.10.1.2 Profit Formula
The profit formula articulates how an organization creates value for itself, and for its
shareholders/stakeholders. Its main components are (1) the revenue model, (2) the
cost structure, (3) the margins model, and (4) resource velocity (Johnson et al.
2008). Revenue models establish the price at a given volume of transactions to cover
overhead, fixed costs, and desired profit margins. Profit formulas also establish the
resource velocity at which the organization turns over assets to achieve adequate
returns. Profit formulas need to account for the customer’s willingness to pay.
Do not assume that business models and profit formulas are interchangeable. The
profit formula is an element of a business model.
Box 1.6 Hortifrut: Worldwide Leader in Berries Production
Hortifrut is a Chilean company and a global leader in the production and commercialization of blueberries. As the world’s second largest provider of berries, it enjoys a comfortable 25% of global market share of blueberries and
has sales in over 35 countries. Its value proposition can be summarized as
“berries for the world – every day.” That appeals to both wholesale customers
and retailers such as Carrefour, Walmart, and Costco, as it simplifies and
strengthens supply chains. At the same time, this value proposition enables
the company to capture attractive prices all year instead of facing periods
when prices drop because of excessive supply.
Box 1.7 Safaricom and M-Pesa: The Power of an Effective Value
Proposition
While experimenting with diverse business models to develop a micro-loan
business in Kenya, the telecom firm Safaricom found a much more compelling value proposition: a cheap, safe, and reliable system to send money by
mobile phone to friends and family in rural areas. This insight became the key
value proposition of M-Pesa (M for Mobile, Pesa for money in Swahili).
M-Pesa is a branchless banking system that allows customers to pay bills,
deposit, withdraw, transfer, and save money in a virtual account. In some markets, like Kenya, users can use a mobile phone to transfer money between the
service and a bank account. As of 2018, Safaricom reported more than 28
million M-Pesa users and over 155,000 M-Pesa agents in Kenya. There are
over 10 million active users in countries other than Kenya.
From its humble beginnings in 2007, M-Pesa has become a huge economic
player in Kenya: it processes over 1.7 billion transactions a year, accounting
for more than 50% of Kenya’s GDP value.
1 The Quest for Innovation: Addressing User Needs and Value Creation