Strategy · Proving to Scaling
Profit per X: what you make your money on
You pick the one unit your company makes its money on, work out the profit per unit and see where your engine leaks or gains leverage.
Does this sound familiar?
- Your accountant takes you through the annual accounts, and afterwards you still don't know what you actually make your money on.
- Revenue grows every year, and at the end of the year there's just as little left over.
- A big customer feels like a win, until you work out what they cost in hours and hassle.
- Every year you win new customers, and every year you take on more people to serve them.
Who it's for, and when
For founders whose revenue is growing but whose profit isn't, or who can't say clearly what their company makes its money on. In Proving, the question is whether each customer brings in more than they cost. In Organising, you choose the one X and steer by it. In Scaling, the X shows you where the leverage is. In Searching it's too early: with a handful of customers there's nothing yet to divide.
The model
“If you could pick one and only one ratio […] to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine?”
Collins studied companies that went from average to exceptional. They knew exactly what they made their money on, and could capture it in one ratio: profit per X. Walgreens first measured profit per store. As they opened stores closer together, that number fell while the company got better. They switched to profit per customer visit, and that showed where the money came from. Nucor steered by profit per ton of steel.
The X is the unit you can say this about: if the profit per unit rises every year, our company gets stronger. What the X does for you depends on your phase. In Proving it's almost always the customer, and the question is whether they bring in more than they cost. The sums for that are in the lesson Proving: how do you make it repeatable? In Organising you look for the unit that really shows what you make your money on, and it's often not the one you expected. In Scaling you divide your costs by X too: if you add more X while the cost per X falls, every euro of revenue costs less than the one before.
This lesson shows where the leverage comes from. The sums for the whole company, with the cost ratio, are in the lesson Scaling: take the margin or win the market?
Jim Collins, Good to Great (2001), chapter 5 on the Hedgehog Concept. Its third circle is your economic engine: what drives it, and which single denominator, profit per X, makes it visible. Verne Harnish put profit per X on the One-Page Strategic Plan in Scaling Up (2014).
The unit
What do you divide the profit by? A customer, a project, a contract, a branch, an order. One unit, countable, and something you can grow through your own choices.
The profit
Divide the profit, not the revenue. Revenue per X can rise while you lose money on each one. Only once the costs are in do you see whether your engine is getting stronger.
The explanation
Why this unit in particular is the engine. In one or two sentences: if profit per X rises, what's got better in the company?
The cost per X
Mostly in Scaling. If the number of X grows and the cost per X stays the same, you're growing with the same engine, just bigger. If it falls, you've got leverage.
Pitfalls
Keeping more than one X
Profit per customer and per FTE and per project. Then every meeting steers by a different number. Pick one. You can measure the rest, but the conversation is about this one.
The X that gives the nicest number
You pick the unit where the line points up. The real question is which unit makes your company stronger when it rises, even if that number's disappointing right now. In the worked example alongside, profit per FTE looked fine.
A rise that doesn't last
Profit per FTE rises because everyone's working overtime, or profit per customer because you're delivering less. Collins asks for the X with the most sustainable impact. Whenever it rises, check where the rise comes from.
Watch and read
The question behind the box in two minutes: what drives your economic engine, and which one unit you watch.
Watch on YouTubeFrom 16:50, five minutes on gross margin, and on what happens when you grow while losing money on every customer: the more revenue, the bigger the hole.
Watch on YouTubeWhat operating leverage is: why profit grows faster than revenue when your fixed costs don't grow with it. The Scaling side of this lesson.
Watch on YouTubeRead
Good to Great
Jim Collins · 2001 · ISBN 9780066620992
Where the model comes from. Chapter 5 on the Hedgehog Concept, with the economic engine and the Walgreens and Nucor examples. There's also a Dutch edition, Good to great (Business Contact, ISBN 9789047093848).
View the bookApply it
- 1
Write down three to five candidates
Per customer, per project, per contract, per FTE, per branch, per order. What could the denominator be in your company?
- 2
Work out two or three years for each candidate
A year's net profit divided by the number of X in that year. Do it for two or three years and look at the direction. The worked example alongside shows how.
- 3
Split the best candidate by type
The average doesn't tell you where it leaks. Put large and small customers or projects side by side, and estimate what each group brings in. A rough estimate is enough.
- 4
Pick one and write the explanation
For each candidate, ask: what's better if this rises? Pick the X where the answer fits how you want to work. Discuss it with your leadership team and let them pick holes in it.
- 5
Work out the cost per X too
If it falls while X grows, you've got leverage. If it stays the same, look for the costs that grow with every new X. What you do with the leverage, take profit or lower your price, is in the lesson Scaling: take the margin or win the market?
Scaling: take the margin or win the market?
Examples
The sums: an agency moving from profit per FTE to profit per customer
Year 1: revenue €2.0m, profit €200,000, 20 FTE, 40 customers. Profit per FTE €10,000. Profit per customer €5,000. Year 2: revenue €2.4m, profit €240,000, 24 FTE, 60 customers. Profit per FTE €10,000. Profit per customer €4,000. Per FTE nothing moved, per customer it dropped. Split out: 15 customers on a monthly contract: revenue €1.5m, profit €300,000, that's €20,000 per customer. 45 one-off customers: revenue €0.9m, loss €60,000, that's a loss of €1,333 per customer. The agency chose profit per customer and introduced a minimum fee of €2,500 a month. Year 3: 32 customers, revenue €2.2m, profit €352,000, that's €11,000 per customer.
The Scaling sums: cost per X going down
An installation company with maintenance contracts. The X is the contract. Last year: 1,000 contracts, revenue €3.0m, costs €2.7m. Per contract: revenue €3,000, costs €2,700, profit €300. This year: 1,400 contracts, revenue €4.2m, costs €3.5m. Per contract: revenue €3,000, costs €2,500, profit €500. The cost per euro of revenue went from 90 to 83 cents. Routes are now planned by postcode, an engineer fits in one more visit a day, and a fault is looked at remotely first. At the old cost per contract, profit would have been €420,000. Now it's €700,000.
Template for the box
Profit per X: profit per [unit] Explanation: if profit per [unit] rises, we've got better at ... Current value: [year] €..., [year] €..., [year] €... Cost per [unit]: [year] €..., [year] €...
Do this in your own business
Everything up to here is free. What you fill in for your own business, you keep in Boldcaster.
- You write the Profit per X section of your strategy, and it stays on your strategy page.
- You assign the lesson to your team and see who has done it.
- The quiz counts towards your progress, and you see which lesson comes next.
Four weeks free. You'll land straight in this lesson.
Quiz
7 situations. You need 6 of 7 right. You can try again at any time.
1.Your revenue has grown by twenty per cent a year for three years, and your profit has stayed flat. What helps most to see what's going on?
2.At an agency, profit per FTE stays the same for two years, while profit per customer falls. What does that tell you?
3.A chain of six bakeries opens two more, in the same town. Profit per branch falls, and customers come in more often. What do you learn from Walgreens?
4.A construction company suggests profit per resident of the region as its X. What's the objection?
5.Your X is profit per contract. The number of contracts grew by 40%, and the cost per contract stayed the same. What does that tell you?
6.At a consultancy, profit per FTE is rising because everyone is routinely working ten hours of overtime a week. What does that tell you?
7.Your X is profit per project. Someone proposes a new service: lots of small one-hour jobs. Which question do you ask first?
Nothing is saved here. In the app, the quiz counts towards your progress.
Read next
- Your sandbox · You write down where your company plays, by region, target audience and product, and what it says no to, even if you've just changed course.
- Your exit goal · You pick an amount and a year for what your company is worth, work out whether it's achievable, and know what you want when the moment comes.
Not sure where to start? Take the growth scan