Profit Pools: A Fresh Look Essay

Dell was setting a very rapid pace of new product introductions during the period analyzed by the author and afterwards as well. The focus on just the direct channel and thoughts of disintermediating the indirect channels through their highly successful direct build-to-order model blinded Dell from the much larger and more diverse profit pool all channels could provide. Ignoring these market dynamics and believing the direct model was by far going to win the battle of channel models in the PC industry, Dell experienced exceptional declines immediately following this rapid run-up of growth. In the end, Dell chose to use the profit pool concept to gain an even greater insights into their customer base and was able to generate profits 3 times higher than industry average (Gadiesh, Gilbert, 1998). Dell recovered form a potentially disastrous situation by using the profit pool concept effectively.

There is also the example of how Anheuser-Busch was able to use the positioning of Michelob and their core product line, Budweiser using pricing and profit pool concepts to drive economies of scale on their lower-cost products.This approach also allowed for greater flexibility in their massive distribution network, and using price execution strategies, Anheuser-Busch was able to successfully differentiate their brands and still obtain exceptionally high margins. This company succeeded with profit pool analysis because it paid attention to how their prices impacted the composition, growth and shifting differences in their profit pool.

Conclusion

The lessons learned from this article show that profit pools must be based on value chains to be effective. They must also be tightly integrated to the overall business models within industry participants so that pricing strategies can be used for creating greater value and differentiation. The lessons in this study show that profit pools also vary significantly over time and disruptive innovation can in fact deliver much greater profit opportunities than many may initially see. The future of competing in stagnant or highly price-competitive industries need to begin with a focus on profit pools not price competition alone.

References

Gadiesh, O., & Gilbert, J.L. (1998, Profit pools:….....