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Business model patterns

Met an industry you have never studied? Spot the pattern, then ask the pattern's questions. Fifteen ways of making money repeat across almost every industry. Each one tells you which number to ask for first and which questions the case will turn on.

How to use this page in a case

  1. Listen to the prompt and ask yourself who pays, for what, and what the business must own to deliver it.
  2. Match that to one or two patterns below. Most businesses mix two, for example a hotel brand that is both "fill the assets" and "franchise".
  3. Ask for the pattern's first measure, then use its case questions to build your structure.

Pattern 1 of 15

Fill the assets

The business owns costly assets whose costs barely change with use, so profit depends on how full those assets are.

How to spot it: Big fixed assets, perishable capacity (an empty seat tonight cannot be sold tomorrow), and talk of "occupancy", "load factor" or "capacity".

How it works, why it pays, how it fails

The company pays for planes, rooms, beds, machines or a network whether they are used or not. Each extra customer adds a little variable cost (a cost that moves with each unit sold), such as fuel, cleaning or a meal. So once the fixed costs are covered, most of the money from each extra customer is profit. Below the breakeven point (the level of use where revenue just covers all costs), every empty seat or room is a loss that cannot be won back later.

Why it can pay very well

When demand is strong, the last few customers cost almost nothing to serve, so profit rises much faster than revenue. A full hotel or a full flight is very profitable.

How it fails

When demand falls, the costs stay and the losses pile up fast. Firms often cut prices to fill seats, which starts a price war that hurts everyone.

The lever that matters most
Utilization at a good price: how full the assets are, without cutting prices too far to fill them.
Ask for this first
Utilization (load factor, occupancy). The share of the capacity that is actually sold, for example seats filled out of seats flown, or rooms sold out of rooms available.

Case questions it creates

  • “Profits fell this year even though prices held up. Where would you look first?”
  • “What load factor does this route need to break even?”
  • “Should the hotel cut its room rate to lift occupancy?”
  • “We are thinking of adding a second plant. What utilization do we need across both to make money?”
A worked example (illustrative)

One short-haul flight in Europe: 180 seats, 85 percent full, each passenger paying EUR 100 (fare plus extras such as bags). The same flight as in the unit economics lesson.

Worked example for Fill the assets, in EUR per flight. Illustrative figures.
LineEUR per flight
Revenue: 180 seats x 85 percent full x EUR 100EUR 15,300
Fuelminus EUR 4,200
Airport and navigation feesminus EUR 3,000
Crewminus EUR 1,800
Maintenanceminus EUR 1,200
Aircraft (lease or ownership)minus EUR 2,500
Overheadminus EUR 1,100
Profit per flightEUR 1,500

So what: The costs of EUR 13,800 are the same whether the plane is full or not. The flight breaks even at about 77 percent full (13,800 divided by 18,000). At 75 percent full it would lose EUR 300.

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Pattern 2 of 15

Marketplace

The business connects buyers and sellers and keeps a share of every transaction, without owning what is sold.

How to spot it: The company does not own what is sold, has two groups of customers, and earns a commission or "service fee".

How it works, why it pays, how it fails

Sellers list goods, rooms, rides or meals; buyers find and pay for them on the platform. The platform keeps a fee on each sale, called the take rate (the share of each transaction it keeps as revenue). Its revenue is the total value booked (gross booking value, or GBV) times the take rate. It has to attract both sides at once: buyers come for choice, sellers come for buyers.

Why it can pay very well

The platform does not hold stock or own the rooms, so it needs little capital. Once both sides are large, each extra sale costs very little to handle.

How it fails

Winning both sides costs a lot in marketing and discounts, and a rival with a lower take rate can pull sellers away. If buyers and sellers start dealing directly, the platform loses the sale.

The lever that matters most
The take rate, set as high as the value the platform adds, and no higher.
Ask for this first
Gross booking value and take rate. The total value of everything sold on the platform, and the share of it the platform keeps.

Case questions it creates

  • “Should the platform raise its commission from 12 to 14 percent?”
  • “Bookings are growing but revenue is flat. What is happening to the take rate?”
  • “Which side of the market should we spend our marketing budget on first?”
  • “A rival charges sellers less. How many of our sellers would leave?”
A worked example (illustrative)

A fictional travel marketplace in Southeast Asia books USD 2,000 million of trips a year and keeps 12 percent. The same numbers as in the business models lesson, with its yearly costs added.

Worked example for Marketplace, in USD millions a year. Illustrative figures.
LineUSD millions a year
Revenue: USD 2,000 million booked x 12 percent take rateUSD 240
Marketing to win buyers and sellersminus USD 90
Technology and productminus USD 50
Customer support and payments handlingminus USD 40
Operating profitUSD 60

So what: Each point of take rate is worth USD 20 million, a third of today's profit. But if a higher rate pushes sellers to a rival, bookings fall and the gain disappears.

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Pattern 3 of 15

Subscription

Customers pay a fixed amount every month or year to keep using the product, so revenue repeats until they leave.

How to spot it: Words like "members", "subscribers", "plans", "monthly fee" or "renewals"; the customer pays again and again for access.

How it works, why it pays, how it fails

The company spends money up front to win each customer; this is CAC (customer acquisition cost). The customer then pays every month, and the company keeps a contribution (the payment minus the cost of serving them). Some customers cancel each month; that share is churn. The value of a customer over their whole stay is LTV (customer lifetime value): monthly contribution times the months they stay, which is about 1 divided by monthly churn.

Why it can pay very well

Revenue is steady and easy to forecast. Customers who stay for years repay the cost of winning them many times over, and serving one more customer often costs little.

How it fails

If churn rises, customers leave before they repay what it cost to win them, and growth only buries more cash. Price rises can push churn up.

The lever that matters most
Churn: keeping customers longer raises the value of every customer already won.
Ask for this first
Churn, then LTV compared with CAC. The share of customers who leave each month, and whether a customer is worth more over their life than it cost to win them.

Case questions it creates

  • “Subscriber numbers are growing but the company still loses money. Why?”
  • “Should we raise the monthly price by 10 percent?”
  • “How much can we afford to spend to win one new customer?”
  • “Churn went from 2 to 3 percent a month. What does that do to the value of a customer?”
A worked example (illustrative)

A fictional software company sells project tools at USD 30 per user per month with an 80 percent gross margin. A typical customer buys 20 user seats, costs USD 7,200 to win and churns at 2 percent a month (stays about 50 months). The same case as in the unit economics lesson.

Worked example for Subscription, in USD per customer, over the customer's life. Illustrative figures.
LineUSD per customer, over the customer's life
LTV: 20 seats x USD 30 x 80 percent margin x 50 monthsUSD 24,000
CAC: cost to win the customerminus USD 7,200
Value of one customer after the cost to win themUSD 16,800

So what: LTV is about 3.3 times CAC, and the cost comes back in 15 months (7,200 divided by 480 a month). If churn doubles to 4 percent a month, the average stay halves to 25 months and LTV falls to USD 12,000.

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Pattern 4 of 15

Razor and blade

The company sells the base product cheaply, sometimes at a loss, and earns its profit on the refills the customer keeps buying.

How to spot it: A device plus consumables that only fit it: cartridges, capsules, strips, filters, blades.

How it works, why it pays, how it fails

The base product (the razor: a printer, a coffee machine, a device) is priced low to win many owners. Every owner then needs refills or supplies (the blades: ink, capsules, test strips) again and again. The refills carry a high margin, so the profit comes over years of use. The number of base products in use is the installed base, and it drives future refill sales.

Why it can pay very well

Once the customer owns the base product, they tend to keep buying the matching refills, often for years and at a high margin.

How it fails

Cheaper copy refills from other makers take the profit, and customers who never buy refills leave only the loss on the base product.

The lever that matters most
Refill capture: the share of an owner's refill spending that goes to the company, for as long as the device is used.
Ask for this first
Installed base and refill revenue per device. How many devices are in use, and how much each one brings in refills per year.

Case questions it creates

  • “Printer sales are up but profits are down. What is happening to ink sales per printer?”
  • “Should we sell the machine at a loss to win more customers?”
  • “Cheaper third-party capsules have arrived. How much of our profit is at risk?”
  • “How long does a customer need to keep buying refills for the device to pay off?”
A worked example (illustrative)

A printer is sold at a USD 10 loss. The owner then buys USD 100 of ink a year at a 60 percent gross margin, for 3 years. The same example as in the business models lesson.

Worked example for Razor and blade, in USD per printer, over its life. Illustrative figures.
LineUSD per printer, over its life
Loss on the printerminus USD 10
Ink gross profit: USD 100 a year x 60 percent x 3 yearsUSD 180
Lifetime gross profit per printerUSD 170

So what: Almost all the profit is in the ink. If the owner switches to cheaper ink from another maker after the first year, lifetime gross profit falls from USD 170 to USD 50.

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Pattern 5 of 15

Franchise

The brand owner lets local owners run outlets under its name and earns fees and royalties on their sales, while they own and run the outlets.

How to spot it: Many outlets with one brand, run by local owners; talk of "royalties", "system sales" or "franchisees".

How it works, why it pays, how it fails

Franchisees (the local owners) pay to open an outlet and then pay a royalty, a set share of their sales, often with a marketing fee and sometimes rent. The franchisor (the brand owner) supplies the brand, the menu or product, the systems and the training. Franchisees pay for the building, the staff and the stock, so the franchisor needs little capital to grow. The franchisor's income follows system sales (the total sales of all outlets), not each outlet's profit.

Why it can pay very well

Royalties come off the top of sales, with few costs attached, so the franchisor earns high margins and can grow fast with other people's money.

How it fails

If outlets stop making money, franchisees close them or stop investing, and system sales fall. The brand also loses some control over quality.

The lever that matters most
Franchisee health: outlets that make good money open more outlets and keep the brand strong.
Ask for this first
System sales and sales per outlet. The total sales of all outlets under the brand, and the average sales of one outlet.

Case questions it creates

  • “Should the chain franchise its company-owned restaurants?”
  • “Royalty income is growing but franchisees are complaining. Should we worry?”
  • “What royalty rate can we charge without hurting new outlet openings?”
  • “How fast can we expand abroad, and who should run the outlets?”
A worked example (illustrative)

A fictional burger brand in the UAE has 120 franchised outlets. Each sells AED 5 million a year and pays a 5 percent royalty. The same numbers as the franchise drill in the business models lesson, with the brand's own costs added.

Worked example for Franchise, in AED millions a year. Illustrative figures.
LineAED millions a year
Royalties: 120 outlets x AED 5 million x 5 percentAED 30
Support for franchisees (training, audits, field staff)minus AED 8
Brand head officeminus AED 6
Franchisor operating profitAED 16

So what: The brand keeps about half of its royalty income as profit and carries none of the outlets' rent, staff or food costs. Ten more outlets at the same sales add AED 2.5 million of royalties.

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Pattern 6 of 15

Commodity

The company sells a product that is the same whoever makes it, so it takes the market price and wins only by having lower costs than rivals.

How to spot it: A product people buy on price alone, a price quoted on an exchange or index, and talk of "the cycle" or "cost per tonne".

How it works, why it pays, how it fails

Oil, copper, wheat or basic chemicals are sold at a world or regional market price that no single seller sets. Every producer has a cost per unit, and lining producers up from lowest to highest cost gives the cost curve. The price tends to settle near the cost of the most expensive producer still needed to meet demand. Prices swing with the cycle: high prices bring new supply, which then pushes prices down again.

Why it can pay very well

A producer with low costs earns a wide margin when prices are high and still makes money when prices fall.

How it fails

A high-cost producer loses money as soon as prices drop, and big new mines or plants often come on stream just as the cycle turns.

The lever that matters most
Cost position: where the company sits on the industry cost curve.
Ask for this first
Cash cost per unit compared with the price. What it costs to produce one tonne or one barrel, set against today's market price and against rivals' costs.

Case questions it creates

  • “Prices have fallen 30 percent. Which of our mines should we keep open?”
  • “Where do we sit on the cost curve compared with our rivals?”
  • “Should we invest in a new plant now, at the top of the cycle?”
  • “How much of our profit swing comes from price, and how much from our own costs?”
A worked example (illustrative)

A fictional copper mine sells at an assumed price of USD 9,000 a tonne. It costs USD 5,500 a tonne to mine and process, plus USD 800 a tonne to keep the equipment running (sustaining capital).

Worked example for Commodity, in USD per tonne. Illustrative figures.
LineUSD per tonne
Market price (the mine cannot choose it)USD 9,000
Cash cost to mine and processminus USD 5,500
Sustaining capitalminus USD 800
Margin per tonneUSD 2,700

So what: The mine cannot raise its price, so every dollar of cost saved is a dollar of margin. If the price fell to USD 6,000 a tonne, the mine would lose USD 300 on each tonne.

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Pattern 7 of 15

Regulated return

A regulator lets a monopoly network, such as power lines or water pipes, charge enough to cover its costs and earn a set return on the money invested in it.

How to spot it: A network that only one company can sensibly own (grid, pipes, rail track, airports), with prices set by a regulator.

How it works, why it pays, how it fails

Some networks make no sense to build twice, so one company runs them and a regulator (a government body) controls the prices. The regulator values the money invested in the network; this is the regulated asset base. It then allows revenue to cover operating costs, depreciation (the asset base being paid back over its life) and a return on the asset base. Prices are reset every few years, and a company that beats its cost targets usually keeps part of the saving.

Why it can pay very well

Revenue is steady and protected by law, and growing the asset base grows the allowed profit, so these companies can borrow cheaply.

How it fails

The regulator can cut the allowed return at the next reset, and cost overruns or poor service can bring penalties.

The lever that matters most
Growing the asset base with approved investment, and beating the regulator's cost targets.
Ask for this first
Allowed return on the regulated asset base. The percentage return the regulator lets the company earn on the value of its network.

Case questions it creates

  • “The regulator plans to cut the allowed return by half a point. What does that do to profit?”
  • “Should the water company invest in new pipes now or after the next price reset?”
  • “How can the network company earn more than its allowed return?”
  • “Is it worth buying a regulated electricity network at this price?”
A worked example (illustrative)

A fictional electricity network has a regulated asset base of GBP 10,000 million, an assumed allowed return of 5 percent, a 40-year life for depreciation and an operating cost allowance of GBP 300 million. It spends GBP 280 million, beating the allowance.

Worked example for Regulated return, in GBP millions a year. Illustrative figures.
LineGBP millions a year
Allowed revenue: return (10,000 x 5 percent) + depreciation (10,000 / 40) + operating costs (300)GBP 1,050
Actual operating costsminus GBP 280
Depreciationminus GBP 250
Operating profit, before interest and taxGBP 520

So what: GBP 500 million is the allowed return; the extra GBP 20 million comes from beating the cost allowance, and in many regimes part of it is shared with customers. A cut of one point in the allowed return removes GBP 100 million.

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Pattern 8 of 15

Float

The company collects money now and pays it out later, and earns a return on the money while it holds it.

How to spot it: Customers pay before the service is used or claimed: insurance, and also gift cards, deposits taken in advance and prepaid plans.

How it works, why it pays, how it fails

An insurer collects premiums (the price of a policy) up front and pays claims months or years later. The money it holds in between is the float, and the insurer invests it. Underwriting result is premiums minus claims and expenses; the combined ratio is claims plus expenses divided by premiums. A combined ratio under 100 percent means the insurer profits from the policies themselves, before any investment income.

Why it can pay very well

A disciplined insurer earns twice: once on the policies and again on investing the float.

How it fails

Pricing policies too low to win business, or a big disaster, pushes the combined ratio over 100 percent, and investment income may not cover the loss.

The lever that matters most
Pricing risk correctly, so the combined ratio stays below 100 percent.
Ask for this first
Combined ratio. Claims plus expenses as a share of premiums. Below 100 percent, the policies make money on their own.

Case questions it creates

  • “The insurer is growing fast but profits are falling. What is the combined ratio doing?”
  • “Should we cut prices to win market share in car insurance?”
  • “Interest rates have risen. How does that change our profit?”
  • “Which lines of business should we stop selling?”
A worked example (illustrative)

A fictional general insurer writes EUR 1,000 million of premiums a year, pays EUR 650 million of claims and EUR 300 million of expenses, and holds an average float of EUR 1,200 million invested at 4 percent.

Worked example for Float, in EUR millions a year. Illustrative figures.
LineEUR millions a year
PremiumsEUR 1,000
Claimsminus EUR 650
Expenses (commissions, staff, systems)minus EUR 300
Investment income: EUR 1,200 million float x 4 percentEUR 48
Profit before taxEUR 98

So what: The combined ratio is 95 percent (650 plus 300, divided by 1,000), so the policies earn EUR 50 million on their own. At 105 percent they would lose EUR 50 million, more than the EUR 48 million of investment income.

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Pattern 9 of 15

Spread

The company borrows money at one interest rate and lends it at a higher one, and keeps the difference.

How to spot it: Deposits and loans, interest rates, "lending", "credit" or "balance sheet" in the prompt.

How it works, why it pays, how it fails

A bank takes deposits and pays savers interest, then lends that money to people and firms at a higher rate. The gap, after interest paid, is net interest income; divided by the loans and other interest-earning assets, it is the net interest margin. From that the bank pays its running costs and sets money aside for loans that will not be repaid (the cost of risk). Because the margin on each dollar is small, a bank needs a large balance sheet and must keep bad loans low.

Why it can pay very well

Deposits are often a cheap and steady source of money, and a bank with low costs can earn a good return on a large, safe loan book.

How it fails

Loan losses rise in a downturn and can wipe out a year of margin, and depositors can leave quickly if they lose trust.

The lever that matters most
The net interest margin, protected by cheap deposits and careful lending.
Ask for this first
Net interest margin. Interest earned minus interest paid, divided by the loans and other assets that earn interest.

Case questions it creates

  • “Interest rates are falling. What happens to the bank's profit?”
  • “Should the bank grow its lending to small businesses?”
  • “Loan losses doubled this year. How much of our profit is left?”
  • “How can a digital bank compete on deposits with the big banks?”
A worked example (illustrative)

A fictional bank lends USD 1,000 million at 6 percent, funded by USD 900 million of deposits at 3 percent and its own capital.

Worked example for Spread, in USD millions a year. Illustrative figures.
LineUSD millions a year
Interest earned: 1,000 x 6 percentUSD 60
Interest paid: 900 x 3 percentminus USD 27
Running costs (staff, branches, technology)minus USD 17
Loan lossesminus USD 6
Profit before taxUSD 10

So what: Net interest income is USD 33 million, a net interest margin of 3.3 percent. One extra point of loan losses on the USD 1,000 million book would cost USD 10 million, the whole profit.

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Pattern 10 of 15

Network effects

Each extra user makes the product more useful for every other user, so the biggest network tends to keep growing.

How to spot it: The product is worth more when more people use it: payments, messaging, social apps, operating systems, exchanges.

How it works, why it pays, how it fails

A messaging app is useful only if your friends use it, and a card is useful only if shops accept it. So each new user or shop makes the network more attractive, which brings in more users without paying for them. Most of the cost is fixed (building and running the product), so the cost of serving one more user is small. Once a network leads, users find it hard to leave, because their contacts or customers are there; this is a switching cost.

Why it can pay very well

Growth partly feeds itself, costs are spread over more users, and the leader can earn high margins for a long time.

How it fails

A network that never reaches enough users stays empty and loses money, and a leader can lose users fast if a new network becomes the place to be.

The lever that matters most
Engaged users: people who use the product often and bring others to it.
Ask for this first
Active users and how often they come back. How many people use the product in a month, and what share of them return day after day.

Case questions it creates

  • “A rival app is growing faster than us. Should we pay users to join?”
  • “Which group should we win first: buyers, sellers or developers?”
  • “Why is our cost per user falling as we grow?”
  • “How defensible is this platform if we buy it?”
A worked example (illustrative)

A fictional social app in India has 20 million active users and earns USD 12 per user a year from advertising. Serving and moderating each user costs USD 3 a year; building the product costs USD 100 million a year whatever the size.

Worked example for Network effects, in USD millions a year. Illustrative figures.
LineUSD millions a year
Advertising revenue: 20 million users x USD 12USD 240
Serving and moderation: 20 million users x USD 3minus USD 60
Product and engineering (fixed)minus USD 100
Marketingminus USD 30
Operating profitUSD 50

So what: If users double to 40 million because friends bring friends, revenue rises by USD 240 million but costs rise by only USD 60 million, so profit rises from USD 50 million to USD 230 million.

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Pattern 11 of 15

Long research cycles

The company spends for many years on research where most projects fail, and a few big successes pay for everything.

How to spot it: Years of development before sales, patents, trials, "pipeline" or "time to market".

How it works, why it pays, how it fails

New drugs, chips or aircraft take years of research and testing before the first sale. Most projects fail along the way, so the company runs many at once, like a set of bets. The winners are often protected by patents (a legal right to be the only seller for a period) or by know-how that is hard to copy. When protection ends, rivals copy the product and prices fall, so the company needs the next hit ready.

Why it can pay very well

Once a product works, making one more unit is cheap, and protection lets the company charge far more than that cost for years.

How it fails

Late failures waste years of spending, and a thin pipeline (too few projects coming along) leaves a gap when patents run out.

The lever that matters most
The chance of success at each stage, and how quickly failing projects are stopped.
Ask for this first
Pipeline value adjusted for risk. The value of each project if it succeeds, times its chance of success, added up across all projects.

Case questions it creates

  • “Our best-selling drug loses its patent in two years. What should we do?”
  • “Should we buy a biotech company with one promising drug?”
  • “Which of these five research projects should we stop?”
  • “How much is this drug worth today, before it is approved?”
A worked example (illustrative)

A fictional drug company starts 10 drugs in the first stage of human trials (Phase I). Each costs about USD 120 million to take through trials, and each approved drug is worth about USD 2,000 million. It uses an 8 percent chance of approval, close to the industry average.

Worked example for Long research cycles, in USD millions, for the whole set of 10 drugs, before allowing for time. Illustrative figures.
LineUSD millions, for the whole set of 10 drugs, before allowing for time
Expected value of approvals: 10 drugs x 8 percent x USD 2,000 millionUSD 1,600
Research and trial costs: 10 drugs x USD 120 millionminus USD 1,200
Expected value of the pipelineUSD 400

So what: The company expects fewer than one approval from ten tries. If the chance of approval fell to 6 percent, the expected value of approvals would fall to USD 1,200 million and the pipeline would only break even. Money spent over 10 or more years also has to be discounted, which cuts the value further.

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Pattern 12 of 15

Project based

The company wins large one-off contracts by bidding, and its margin depends on pricing the bid well and delivering on time and on budget.

How to spot it: Tenders, bids, contracts, "backlog" or "order book", and work that ends when the project is delivered.

How it works, why it pays, how it fails

A client asks several firms to bid for a project, such as a building, a road or a consulting study. The firm estimates its costs, adds a margin and bids; the lowest good bid often wins. Once signed, the price is often fixed, so any cost overrun comes out of the firm's own margin. Revenue is lumpy: it depends on winning the next contract, which is shown by the backlog (signed work not yet done).

Why it can pay very well

A firm that estimates well and delivers efficiently can earn a steady margin, and paid variations (changes the client asks for) can add to it.

How it fails

Winning by bidding too low, then overrunning on cost or time, can turn a thin margin into a large loss on a single project.

The lever that matters most
Bid discipline and delivery: pricing risk into the bid, then keeping to budget.
Ask for this first
Backlog and margin on the backlog. The value of signed work not yet done, and the margin expected on it.

Case questions it creates

  • “Revenue is growing but the firm is losing money on half its projects. Why?”
  • “Should we bid for this large airport contract?”
  • “The project is 20 percent over budget. What can we still do?”
  • “How should we price a fixed-price contract with uncertain costs?”
A worked example (illustrative)

A fictional contractor in Saudi Arabia wins a fixed-price building contract for SAR 100 million.

Worked example for Project based, in SAR millions, for the whole project. Illustrative figures.
LineSAR millions, for the whole project
Contract priceSAR 100
Materialsminus SAR 45
Subcontractorsminus SAR 25
Own site labourminus SAR 15
Site overheads and equipmentminus SAR 7
Project marginSAR 8

So what: An 8 percent margin, close to the typical operating margin of builders. A 10 percent overrun on materials and subcontractors (SAR 7 million) would cut the margin to SAR 1 million.

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Pattern 13 of 15

Scale retail

The company earns a thin margin on each sale and makes money through huge volume, fast-moving stock and buying power.

How to spot it: Stores, shoppers, baskets, thin margins, suppliers and talk of "volume" or "stock".

How it works, why it pays, how it fails

A grocer or discount retailer keeps only a few cents of each dollar of sales as profit. It makes up for that by selling a lot, and by selling its stock quickly; how often stock is sold and replaced in a year is the stock turn. Size brings buying power, meaning lower prices from suppliers, and spreads the costs of warehouses, trucks and systems. Fast stock turns also mean the retailer is often paid by shoppers before it pays its suppliers.

Why it can pay very well

Small gains on huge volume add up, and the cash from paying suppliers later funds growth.

How it fails

With a margin of 2 or 3 percent, a small rise in costs or a price war can wipe out the profit, and a smaller rival cannot match the leader's prices.

The lever that matters most
Sales per square metre of space: filling the same stores and trucks with more volume.
Ask for this first
Like-for-like sales and gross margin. Sales growth in stores open a year or more, and the share of each sale left after paying for the goods.

Case questions it creates

  • “Our grocery chain's margin fell from 3 to 2 percent. Where did the money go?”
  • “Should we launch our own cheaper brands (private label)?”
  • “A discount chain is entering our market. How should we respond?”
  • “Should we close our weakest stores?”
A worked example (illustrative)

One fictional supermarket in Europe with EUR 20 million of sales a year and a 25 percent gross margin.

Worked example for Scale retail, in EUR thousands a year, one store. Illustrative figures.
LineEUR thousands a year, one store
SalesEUR 20,000
Cost of the goods soldminus EUR 15,000
Store staffminus EUR 2,400
Rent and utilitiesminus EUR 1,200
Other store costsminus EUR 600
Share of head office and distributionminus EUR 400
Store operating profitEUR 400

So what: A 2 percent margin. Buying the goods EUR 200 thousand cheaper (one point of gross margin) would raise profit by half, while a 2 percent rise in staff and rent costs (EUR 72 thousand) would cut profit by almost a fifth.

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Pattern 14 of 15

Brand premium

The company charges far more than the product costs to make, because customers pay for the brand, the status and the scarcity.

How to spot it: High prices far above the cost to make, strong brand names, waiting lists, and worry about discounts or "brand dilution".

How it works, why it pays, how it fails

Materials and making are a small share of the price; the rest pays for the brand, the stores, the marketing and the profit. Brands keep prices high by limiting supply, avoiding discounts and controlling where the product is sold. They spend heavily on marketing and on their own stores to protect the image. Customers often want the product because it is expensive and hard to get.

Why it can pay very well

Pricing power: a strong brand can raise prices year after year without losing buyers, so margins are among the highest of any consumer business.

How it fails

Discounting, selling too widely or chasing volume makes the brand ordinary, and once the image is damaged the premium is hard to win back.

The lever that matters most
Pricing power, protected by scarcity and full-price selling.
Ask for this first
Share of sales at full price. How much of the product sells without a discount; it shows whether the brand still holds its price.

Case questions it creates

  • “Should the luxury brand open an outlet store to sell old stock?”
  • “Sales are growing fast in one market. Should we increase supply?”
  • “Should the brand launch a cheaper line to reach younger buyers?”
  • “Should we sell through department stores or only our own shops?”
A worked example (illustrative)

One handbag from a fictional luxury brand, sold at EUR 3,000 in its own store.

Worked example for Brand premium, in EUR per handbag. Illustrative figures.
LineEUR per handbag
PriceEUR 3,000
Materials and craftminus EUR 450
Own stores and staffminus EUR 700
Marketing and eventsminus EUR 350
Design and head officeminus EUR 300
Operating profit per bagEUR 1,200

So what: Making the bag is only 15 percent of the price, and the profit is 40 percent. A 20 percent discount (EUR 600) would halve the profit per bag and teach buyers to wait for sales.

In the real world

Industries that follow it

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Pattern 15 of 15

Asset-light fees

The company earns a small fee on money, assets or activity that belong to others, so it needs little capital of its own.

How to spot it: Fees quoted as a percentage of assets or of each transaction, and a business that does not own the thing it earns on.

How it works, why it pays, how it fails

An asset manager charges a yearly fee, a small percentage of the money it manages for clients (assets under management, or AUM). Payment networks, brokers and hotel brands work the same way: a fee on each payment, trade or room night that others own or carry out. Revenue follows the value of what others own or do, so it rises and falls with markets and activity. Most costs (people, technology) are fixed, so extra volume adds mostly profit.

Why it can pay very well

Little capital is needed, and fees grow as the assets or activity grow, often without adding many staff.

How it fails

Fees face steady price pressure from cheaper rivals such as index funds, and a market fall cuts revenue while costs stay the same.

The lever that matters most
Volume of assets or activity, while holding the fee rate.
Ask for this first
Assets or volume, and the fee rate. How much money or activity the fee is charged on, and the percentage charged.

Case questions it creates

  • “Markets fell 20 percent. What happens to our profit?”
  • “Clients are moving to cheaper index funds. How should we respond?”
  • “Should we cut our fee to win more assets?”
  • “Should the hotel group sell its hotels and keep only the brand?”
A worked example (illustrative)

A fictional asset manager looks after USD 50,000 million for clients and charges an average fee of 0.5 percent a year.

Worked example for Asset-light fees, in USD millions a year. Illustrative figures.
LineUSD millions a year
Fees: USD 50,000 million x 0.5 percentUSD 250
Staff (fund managers, analysts, sales)minus USD 110
Distribution (paid to platforms and advisers)minus USD 40
Technology and dataminus USD 30
Other costsminus USD 20
Operating profitUSD 50

So what: A 20 percent market fall cuts assets and fees by USD 50 million, the whole profit, because most costs stay the same. Cutting the fee to 0.4 percent would cost the same USD 50 million unless assets grew by a quarter.

In the real world

Industries that follow it

Learn it properly

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