How business makes business

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BENEL D. LAGUA

Getting into business used to be as simple as identifying a product or service to sell, making sure the cost of producing said product or service is kept low and earning on the margin. Apple makes money from its iPhones, iPads and accessories, while retail stores, such as Bench, sell clothing, merchandise and other items for profit. But in today’s competitive world, it is interesting that many enterprises actually make more money in less obvious ways. Developing an enterprise in this volatile, uncertain, complex and ambiguous world requires a lot of creativity about ways of generating profits.

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The Huffington Post had this short article on seven businesses making lots of money in ways you wouldn’t expect. Let me start here and use it as a springboard for developing other such examples.

One, McDonalds (US) earns the bulk of its profit charging rent, not selling food. This idea was well documented in the recent movie on Ray Croc, “The Founder.” Two, Lucas Films made more money off “Star Wars” toys than the movie itself. This formula is now standard for many of new films coming out like the Marvel series, and of course Disney. Three, the most profitable restaurants in America made 75 percent of its income from alcohol sales, not food sales in 2011.

Four, car dealership often make more money through financing and servicing than its sales. Five, gas stations make money off food and car accessories than from gas. This trend is likewise observed now in the Philippines, especially at gas stations positioned strategically in key expressways and major thoroughfares. Six, companies that manufacture printers often make more money off ink sales. Note how printers today are often subject to discounts and special offers. Lebron James, Tiger Woods and many other star athletes make more money off endorsements than from actually playing sports.

Do you often wonder how free TV manages to sustain its being free? Of course nothing really is free these days. Television networks, radio, newspapers and the internet rely heavily on advertising. With TV and radio, advertisers pay airtime that varies, depending on which part of the day you want to place your ad and in what specific show it will be played. If you choose to do it primetime, during the morning news show, the noontime show, the 6:00 p.m. news program or during the drama marathon, expect that the price will be as prime.

Free TV is now challenged by cable. If you live in a place where there is no signal, you pay a cable company to bring it to you over a wire. These days, even this model is being challenged as new technology can send a signal using disks and over the air. With cable selling programs without ads, money is being made through subscribers. Cable operators are also selling their services in different ways – digital box rental, sale of program packages and advertisement in basic program channels.

One disturbing money-maker in the media industry, in my view, is when in the middle of a news commentary, the anchor, whether on radio or TV, makes a pitch for a product or service – a vitamin, a chicken retailer, etc. The blur between delivering news and outright advertising is not healthy.

Technology companies make money in various ways. A streaming company such as Netflix makes its money from its subscribers while the Gmail service of Google earns from advertising. Some tech companies offer their services free of charge, initially, but once you get hooked there’s a premium charge for extra capacity. We see this in Evernote or Dropbox. Apple iTunes makes its money from royalties (of music and movie sales or rentals). Another interesting source of income is selling data. Companies such as LinkedIn do this, in addition to advertising and income from subscribers.

Upfront, most think that banks make money through margins between costs of deposits and lending rates. These days, many banks, especially in developed countries, earn through fees – by offering a third-party collection/payment system and other services to its clients that you have never heard before. And for some banks in the country, linkage to sister companies in the conglomerate like real estate, shopping centers and other businesses provides lucrative synergy. Banking and finance also penetrate online systems, the internet and telephony to ease payment systems, of course at a cost.

Credit card companies have various revenue streams. When a consumer pays his purchase through a credit card, a small percentage is paid to the credit card company as transaction fee, which goes to the credit card issuer and the association managing the account. The credit card company likewise collects fees from
cardholders, and this is why I advise consumers to try to get this fee waived. When traveling abroad, some cards will charge foreign transaction cost and if you have to pay in the local currency, the card makes a margin on the exchange rate. Missed payments as well as installment purchases are the kicker, because the charges can cost the consumer quite a bundle.

Other major companies are now beginning to invest in climate change-related products and services. Some examples are Nestle, on its investment in ice cream and water as a clear reaction to global warming, Cobham to supply cameras that will monitor natural calamities such as flash floods and other extreme weather conditions, and Chevron in investing oil production in the arctic, to name a few.

Many business models now operate in unconventional ways common people can hardly imagine. The obvious is no longer straightforward.

Benel D. Lagua is executive vice president at the Development Bank of the Philippines. He is an active FINEX member and a long time advocate of risk-based lending for SMEs. The views expressed herein are his own and do not necessarily reflect the opinion of his office, as well as FINEX.)

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