Description
The purpose of a Profitability Tree is to understand how different revenue and cost factors impact the profitability of your organization. While this framework is commonly used in business management consulting, it is also helpful for marketers. A Profitability Tree can help marketers to visualize the different inputs and levers that, together, determine profitability. While marketing is often focused on increasing revenue, there are a number of ways that new technologies, processes, online services, and digital channels can contribute to cost savings. This framework can be particularly useful at the beginning of a planning process to align your team on those priority areas that will have the biggest impact on your profitability. You can then identify ways that your marketing investments, programs, and decisions can positively impact revenue and costs.
Question
How is our investment in marketing expected to impact our profitability?
Steps
Work from left to right, starting with Revenue. List the main components that determine your revenue as your first-level branch. These will be a version of quantity and revenue per customer, customized to your business.
Now complete your first-level branch from your Costs. These will be a version of Variable costs (do change with production) and Fixed Costs (do not change with production), customized to your business.
Review each component in your first-level branches and ask how you could improve it. Capture these opportunities as new branch levels, making sure that each component is mutually exclusive.
Repeat Step 4 until you have reasonably exhausted all of the ways that you can improve your revenues and your costs. Your Profitability Tree may end up having 4 or 5 levels of branches.
Finally, validate your Profitability Tree with your team. For even small teams, this likely includes reviewing the framework with several people representing the revenue and costs sides of your business.
Considerations
Marketers need to prioritize those branches that will make the biggest impact and inform their marketing plans
Profitability Trees can used to onboard new agencies and team members by visualizing priorities and the big picture
Make sure to update your Profitability Tree as your business performance and operations change over time.