Know Where the Profit Exists Before Deciding Where to Grow

Most management teams can tell you their revenue broken down in many different ways. By geography, business line, division, market, and other segments. What they are less clear on is how much profit is being created in each of those segments, and whether the growth they are pursuing is adding to it or working against it.

Early in my career, I started asking a question that most boards were not asking: where does this industry actually make money? Not where does the company make money, but where is the profit actually created in the market?

That question forces you to look at the full picture, including your competitors, and understand which customers, segments, and positions are genuinely attractive and which ones carry economics that do not hold up under scrutiny.

The way I approach any new market is to estimate what our competitors are making. For public companies, that means listening carefully to their earnings calls and reviewing the filings, and building a picture of where their margins are strongest. For private competitors, it requires more work, building our own back-of-the-napkin picture of their margin and where they are creating it. It is not a precise approach, but it gives us enough to understand where profit is concentrated and which parts of the market are worth competing for.

That analysis usually shows that profit is concentrated in a relatively narrow segment of the customer base. Those tend to be the customers who value what makes you different and are willing to pay for it. That group is almost never the biggest by revenue, but it is where the investment in your differentiation gets rewarded.

Once you understand where that concentration is, it changes the conversation about where to invest. The decisions that look like growth from the revenue line can carry cost structures and service demands that work against the position you are trying to build.

That is what I mean when I say know where the profit exists before deciding where to grow. It is how you make sure the growth you pursue is actually making the business stronger.

I built a structured way to work through this analysis. I call it the Operating Profit Share Framework™, and if you want to understand how it applies to your business, I walk through the whole approach here.