Paradox of Profits

Paradox of Profits:

Profit, one of the most prominent words in today's time, way above values & virtues, to an extent that the ones preaching on values & virtues may only get a listening ear or audience only if they have made hefty profits out of their whatsoever may be the profession.

Be it a one time personal deal or an entire business the focus remains on the bottom-line and that is profits.

ROI on time, resources & energy has to be higher at all times.

Profits in any kind of business are different from benefits, interim or long term, and all that needs to be understood here is that strategies defined determines the profits & its growth. While benefits might be short term or interim gains while taking advantage of a given situation.

Mostly benefits are mistaken as profits, whereas they are not a constant determinant of any business models & may at any point in time change into disadvantage.

We will try to go with a case study

For example, if a business is in manufacturing of cookies & they have a well arranged channel of stockiest & distributors who are buying these varieties of cookies and selling them to the retailers.

Cookies manufacturers are selling their cookies @ 100 to their stockist and distributor, and from there they are selling those cookies to the retailer @ 120 to 125, giving them a net 20 to 25% of margin.

The retailer then may sell those cookies @ 140 to 150, giving them a margin of 16 to 17%.

So the net margin that a manufacturer offers on their product becomes 36 to 42%, while they are themselves making around 8 to 10% of profits on that sales price of 100.

In summary the product is having a net profit margin from cost of production to the purchase price of about 40 to 50%.

Now here is the catch.

Cost of living is growing so is the options of spending & making life more comfortable, leaving every individual to look for increase in the source of income, that is profitability, the manufacturer wants the margin to improve from that 8 to 10% to anything around 15 to 20%, the stockist & distributors is expecting to have their profits increased from that 20 to 25% to 35 to 40% & likewise the retailer looks forward to add into their own profits from given 16 to 17% to anything above 25%.

So an overall 20 to 25% of profits increase if expected combined while the end user is expecting the cookies of the same quality & quantity must be available at a discounted price of 115 from that 140 to 150, that is 22 to 25% discount if expected by the end user.

SO YOU SEE THIS IS THE PARADOX HERE, WHILE THE BUSINESS PARTNERS ARE EXPECTING 25% MORE PROFITS FOR THEMSELVES THE END USER TOO IS EXPECTING THE SAME 25% SAVINGS FOR THEM, A MAJOR GAP OF 50%, SO THE PRODUCT HAS TO CONTINUOUSLY KEEP GETTING BETTER IN QUALITY & YET CHEAPER IN PRICE, A VERY DIFFICULT COMBINATION TO SUSTAIN & GROW.

How to now close up this gap & what are the challenges & opportunities in every such business model:

A) Principle to be adopted & accepted for every business model is that as much as the manufacturers are keen on maintaining or improving with their own profits, the stockist, distributors & retailers that are working in a open market will always have multiple options that may be offering them more & better profit margins and it is their right to go for such options & opportunities, so there must be a roadmap, plan, strategy laid down by the manufacturer as such that as much as they must be able to add into their own profit margins at regular intervals, they may have to make sure to continue to add into the profit margins of these stockist, distributors & retailers, so that they continue to patronize the business.

B) But given the paradox of the 50% gap, one out of many options is to increase the prices and share the profits, but unfortunately that may not work if any another competitor in the same market is offering lower & better prices with higher profit margins, so the only way out of the paradox is psychological targeting of the end user, that is make the end user demand for your brand of cookies & pay the price that you are demanding them to pay for it.

C) Brand value creation & organically making the brand grow with top of mind awareness will continue to bring back the end user asking for your cookies, and there can be 1001 ways to engage in such psychological grooming, as such that the cookies becomes the most essential diet & product for their daily consumption, like how some milk powdered chocolate drinks have made it for themselves. And there is no other way to close up that gap of 50% profit margin.

D) NO individual with any background or experience and understanding can use any magic wand to close up this gap of 50% profit margin without having a brand value of the product that have its own undisputed place, demand & market share, once the cookie is branded as an essential diet it will automatically help every desk in the business to push it further to add another 3 to 5% margin that is the bottom-line.

E) To expect that individuals from various fields will be able to close up that gap of 50% for any non branded cookie may be a hypothetical scenario, that may result in further loss of profits for the manufacturer from that 8 to 10%. 

F) Also the present day market share for the cookies have to be holistically evaluated, if for some given regions that market share is already 70 to 80% than making it grow further may require to automatically give up from that given 8 to 10% of profit margins, that such ideas & are in direct conflict with the most practical theory of coexistence, other competitors businesses will have to sustain side by side to be an example or at times remind to remain relevant & competitive.

G) Today's commoners are brand ambassador of whole bunch of products, they sleep with branded pajamas, eat branded food, drink branded drinks & drive and wear & use branded products, it's all over written on their body & life style not only to impress themselves & derive that satisfaction & motivation to be a branded individual but to also make a mark of themselves in the society. Gen Z may not have money to have two meals a day but cannot live without holding an iphone.

H) Once a brand value has been created, grown & sustained organically, the given 50% gap can not only be overcome but can even offer to reverse it and start giving more profit margins to all the business partners than what was projected or expected, while the cookies & brand continues to become a household name. And with this status achieved, every strategy, promotion & gesture of giving away some % of profits will only add more to the profits.

I) Likewise, if the cookies haven't yet made itself an household name to impact the thinking & buying patterns of the end users, a complete different model of business will be witnessed, whereby every stakeholders will consistently keep looking for better profit margin options, & in the war of profit sharing, the professionals associated in various capacities for the business may remain at constant battle & loss. Whereas that 8 to 10% of manufacturers profit margins may remain under constant threat & pressure as the model is in survival mode & not growth mode.

J) Without having been established as a brand the entire business operation & processes may continue to revolve around those who are able to help sustain that 8 to 10% margins for the manufacturer & the collective contributions from the rest of the stakeholders may not be seen, acknowledged or appreciated. Eventually forming a highway for constant brain drain & loss of skilled, dedicated & value addition from the stakeholders within the system, whereas the stockist, distributors & the retailers will get too used to the same margins & start looking elsewhere without giving a second thought.

K) While making a sale for any non branded product, they have to beg to the stockist & distributors and the retailers will have to beg to the end users, for a well known brand the end user will come to the retailer asking for the brand & its products.

L) Being a brand you can sell what you make, while being a non brand you will have to make what sells & that too will be complimented by taking a hit into the profit margins for every stakeholder in the business.

M) Non branded business may remain relevant only for a period of time till its new or a little different than the branded one & soon the demand will either subside or remain stagnated.

N) While branded business will enjoy not only higher profits & sustained pattern of growth it naturally becomes the segment leader that can not only fix the course of the entire segment but can also dictate the terms of business.

O) While a non branded business will have to extend heavy credits into the market for their products to be pitched & sold, a branded business can get to a level whereby they can demand deposits from the stakeholders to become their partners to be able to sell their products.

P) Being a brand keeps every desk in the entire business chain on their toes to make sure that the product quality are constant, the services are excellent & the customer satisfaction remains the top priority, the focus is on end user, while in that case of every non branded business since their prices has to remain low, stockist & distributor margins higher the focus has to remain on the channel partners & hence the quality of the products & services might remain secondary in its priority.

Q) Branded product business will have to strive very less when they want to expand in its market or manufacturing capacities, as the product presence, market stake, preferences & sustained profitability with little or no efforts to sell those products for the stockist & distributors is a non written yet most significant commitment for their own ROI.

R) Branded product business with its healthy profits can reinvest in innovation, research & development of products that can again be lined up to be launched at regular intervals & thereby add up into the profits of every stakeholder in the entire business chain.

S) Branded business will have a very higher rate of skill retention, giving it an edge over every other non branded competitor in the segment.

T) Non branded business while have to remain busy digging into its own profits to sustain, and engage in daily fire fighting mode, while the hiring & firing of the talent may become a routine, whereby the policy of low cost high maintenance stakeholders will have to be relied upon, whereby the efficiency, performance, dedication & commitment may remain subject to individual discretion. 

U) Branded businesses can take their sweet time to invest in lean manufacturing & cost saving concepts that will in a long run continue to add into the value addition for the entire business, not only the entire team of operations but the stakeholders like the stockist, distributors & retailers will start benefiting from the same.

V) Whereas the non branded business will have to consistently remain on hunt for low hanging fruits to cut down the loss from the profits, the systems & policies will have to be mend, bend & rewritten over in the shortest of periods leaving the stakeholders uncertain about their own ROI.

W) Custom designed options & benefits for the stakeholders may remain in high demand all the time, since the stockist, distributors & retailers are aware that it is a non brand, it automatically becomes their right to demand special status that will in one or another way again eat into the profits of the manufacturer.

X) Again any business that has an established brand can easily enter into any new adventure & use the same brand name & value to fast forward the new venture. Whereas for any non established brand every new venture will have to be started with charity & continue to go the same route as their principle business.

Y) For the branded business vendors, suppliers & contractors will be eager to associate & offer a very competitive rates as they already know that their money is safe and the patronage is going to remain consistent, while based on the same given consistency they too can plan & organize their own business model to become more effective & competitive, thereby getting a better profit margins from within.

Z) Last but the most important, any branded business will always have a good rapport with external investors & they will be very much interested & confident to invest more in either of the ventures that the brand is willing to take it up, as the awareness of brand & the mindset of brand within the strategic thinkers & decision makers in the organization will be able to carry forward their wisdom & experience that they have harnessed over the decades.

Profits of any & every brand will always remain higher, better & consistently growing when compared to any & every new venture that is yet trying to come up in the segment. 

Become a household brand & set the legacy of legends.