The profitability tree
When profits fall, split profit = revenue − costs, then keep splitting until you reach something you can measure.
Revenue = price × volume, by product, channel or customer segment. Costs = fixed + variable, where variable cost is cost per unit × volume.
Then go hunting: ask for the numbers over time and find which branch moved. Compare against competitors to tell a company problem from an industry one. The answer is rarely "costs went up"; it's "the price of our biggest product fell 12% after a rival cut theirs".
Worked example
Build the profitability tree, from the top down.
- Profit
- Revenue = price × volume
- Costs = fixed + variable
- Variable = cost per unit × volume
Profit splits into revenue and costs; costs split into fixed and variable; variable cost is cost per unit times volume. Brand and morale may matter later, but they aren't branches of the math.
Quick check
Profits fell 20%. What's the strongest first step?
Split profit into revenue and costs, and ask which one moved. Find where the drop comes from before proposing any fix.