How to Maintain Profitability in a Changing Market
For lasting profitability, entrepreneurs should focus on contributing to consumer value. This applies to business-to-business too.
Starting a business and making it break even is an extremely difficult accomplishment. Kudos to entrepreneurs managing this feat. But running a business is also no cakewalk. No profitable niche lasts forever, and the more profitable it is, the slimmer the chances are that it will last. Many entrepreneurs, including those with seemingly safe businesses, lost everything when their industries were unexpectedly disrupted.
The taxicab industry is a telling example. It was benefiting from protective regulations that effectively had kept competition low for decades, yet all it took was a couple of tech-savvy guys — Travis Kalanick and Garrett Camp of Uber — to upend the whole industry. Even though their business was not to provide regular taxi service, their innovation undermined that business. Uber and other similar services caused many taxicab companies to go bankrupt and the market value of taxi medallions to plummet.
Related: How to Thrive in Niche Markets
In other words, your business is not safe even if you are already making nice profits and the future looks bright. After all, even protected monopolies eventually get disrupted. What you need is to make sure you can stay profitable in the years and decades to come.
Profitability is to meet the future
The key to profitability is to recognize what businesses are and do from the perspective of the whole economy. Businesses formulate strategies to position themselves with respect to each other and thereby earn profits. So the economic context matters, because it is within the economy that you run your business. It’s an obvious point, but what it means is rarely considered.
In the startup phase, the entrepreneur tries to find and populate a “gap” that allows the business to become profitable. But the same is true for the existing business, which must continue to consider its positioning to stay profitable. That’s what the old-style “Five Forces” framework helps you do — to position your business so that competitors, suppliers, customers and others have as little sway over it as possible. But there is more to it than positioning.
Profits are rewards for a job well-done. But to maintain profitability, your sight must be set to facilitate future value. After all, the line of production that you’re considering today will not be instantaneously available to your customers. The value they get from the goods and services you set out to produce will without exception happen in the future. In other words, profits indicate you did something right. But profitability is a matter of meeting the future.
Customer isn't king, but consumer is
The key to profitability is to imagine how you are contributing to making consumers better off. Note: "consumers" not "customers." In our advanced economy, with two-thirds of all spending being business-to-business (B2B), your customer may not be the consumer. But the consumer is the user of the final product and therefore the one that determines its value. The consumer, therefore, determines also the value of all contributions in the supply chain, albeit indirectly.
This subtle point has important implications. Businesses that produce the final product must focus on what consumers want and, more importantly, what they will want in the near future. But the same applies for B2B to maintain profitability. If you produce for other businesses, the viability of your own business goes only as far as your customer’s. When they are no longer profitable, you are no longer profitable.
To stay profitable over time, look beyond your customer and consider your contribution to the value of the final product. Even if your customer does not recognize it, you should meet the opportunity and innovate to offer your customer an upper hand. If you make your customers thrive, your business thrives. The key is to think about the consumer whether or not you serve them directly.
Microsoft is an example of how to apply this thinking. While the software giant caters primarily to corporations and large institutions, they look ahead and continuously innovate to make it easier for their customers to serve consumers. From software to hardware, Microsoft focuses on providing the tools for productivity. This empowers their customers to serve their customers and, eventually, the consumer. In other words, Microsoft indirectly facilitates value for consumers, which makes Microsoft’s customers competitive and profitable.
Whether or not your business caters directly to consumers, it should still be consumer-oriented. To gain and maintain relevance in the economy, which is necessary to be (and continue being) profitable, requires that you contribute to the value of the final good. The great mistake of the taxicab companies was to focus on their strategic positioning in the market over innovating to facilitate value for consumers. This left the market wide open for a new type of competitor playing by a different rulebook.
All businesses benefit from adopting a consumer-value focus.
Entrepreneur Leadership Network Contributor