Focusing on Profitable Market Segments – Profit Pools Theory

Focusing on Profitable Market Segments - Profit Pools Theory
What are profit pools?

The Profit Pools method of Orit Gadiesh and James L. Gilbert is a strategy model that can be used to help managers or companies focus on profits, rather than on revenue growth. The idea behind it is: managers need to look beyond revenues to see the shape of their industry’s profit pool. In this way strategies can be created which result in profitable growth.

Orit Gadiesh and James L. Gilbert, consultants at Bain & Co. presented the following definition of Profit Pools in their HBR article “Profit Pools: A Fresh Look at Strategy” (May 1, 1998): the total profits earned at all points along the value chain of an industry. Companies that see what others do not see, will be best prepared for capturing a disproportionate share of the profits in an industry.

Although the concept is simple, the structure of Profit Pools is usually quite complex. The pool will be deeper in some segments of the value chain than in others, and depths will vary within an individual segment as well. For example, the profitability of a segment may vary widely by customer group, product category, geographic market, and distribution channel. Moreover, the pattern of profit concentration in an industry will often differ from the pattern of revenue concentration.

Usage of the Profit Pool model

•Identify new sources of profit.

•Rethink the role of a company in the Value Chain.

•Refocusing a company on its traditional sources of profit.

•Make product decisions, pricing decisions and operational decisions.

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