Innovation/Global Risk

How Businesses Hide The Money:

Profits in Dark Corners 

By Shlomo Maital


   Some successful businesses innovate not their products, processes or services, but in the way they generate crucial profits.  Here are a few examples.  After you come up with your own great innovation idea, think about how you could be equally creative in the way you leverage it, to generate sustained and sustainable profits.

  •        Walmart:   This huge retailer, the world’s largest, pays its suppliers in 90 days. However, it makes sure that the products it stocks on its shelves literally fly off the shelf, within days.  That means, Walmart uses its suppliers’ money to finance its business, gaining an interest-free 90-day loan. By investing the money from its sales, for that 90 days, it makes billions in interest on this ‘float’.  This offsets the very low profit margins on its sales.
  •        Better Place:  This company sells electric cars that have replaceable batteries.  Actually that is inaccurate. Renault/Nissan sells the cars (Renault ‘Fluence’). Better Place buys electricity wholesale, at cheap night-time rates, and sells it to its clients, in the form of charged batteries, at high retail rates. The difference between what it pays for electricity and what it charges is its business design and profit center – and it is substantial, otherwise savvy investors (including GE) would never have invested hundreds of millions of dollars.
  •         Amazon:  Ever notice those after-thought ‘S&H’ or shipping and handling charges, starting at $5.95?  Well, Amazon makes much of its money from that innocuous S&H, because generally it doesn’t really cost them $5.95 or whatever they charge..but, well, who can quibble with S&H? 
  •        Car rental firms:  Israel car rental companies are allowed by law to import new cars at substantially lower customs duties than ordinary citizens. After a year or two, they then sell the used cars at market prices.  So, they make their money not from renting cars, but from selling used cars from their fleets.  It might not even matter much if the rental companies rented cars at all, as long as they can sell them in a year or two at a profit. 
  •        Hotels:  Many hotels make most of their revenues not from room rental (occupancy rates are often so low that empty rooms offset money made from rented ones), but from F&B (food and beverage, e.g. the hotel restaurant, provided it is a popular one).  The hotel exists to support its food business. And restaurants, in turn, often make most of their money not from food but from wine and liquor – from the bar. 
  •     For years, especially during the 2001-2008 period, investment banks made money not traditionally, by matching those who have money with those who need it, but by speculating for their own accounts, using their inside information and close-to-the-market privilege to make huge profits.  Instead of money serving clients, money was used to make money for themselves.  Only rarely did outsiders get a true picture of the extent of this “nostrum” trading. The U.S. Congress tried to ban it, but had only partial success.

     Innovator:  What is your business design?  Can you find profit in dark corners?  One advantage is that competitors may try to compete with you in ways that are utterly irrelevant, when they fail to grasp where your true bottom line originates.