Focusing on Profitable Market Segments

Profit Pools

Summary/Abstract

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

Orit Gadiesh, James L. Gilbert, both consultants at Bain & Co., in their Harvard Business Review Article Profit Pools: A Fresh Look at Strategy (May 1, 1998) presented the following definition of a profit pool: the total profits earned at all points along the industry's value chain. Companies that see what others do not will be best prepared to capture a disproportionate share of industry profits.

Although the concept is simple, the structure of a profit pool 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. Segment profitability may, for example, vary widely by customer group, product category, geographic market, and distribution channel. Moreover, the pattern of profit concentration in an industry will often be very different from the pattern of revenue concentration.

The Profit Pools framework can be used to:

- identify new sources of profit,

- rethink a companies value-chain role;

- refocusing on traditional sources of profit;

- make product, pricing, and operating decisions.

👀	TIP: On this website you can find much more about profitability of market segments and Profit Pools!

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