Many entrepreneurs begin their ventures without a full understanding of the products they sell or their market positioning. This lack of knowledge can hinder growth, particularly for product-focused businesses. In Australia, having a clear understanding of both your product and its market is crucial for success, especially in sectors such as engineering design.
The Importance of Product Understanding
A product company is any business that develops and brings new solutions to market, whether it’s a new consumer good or an innovative technology. The challenge lies not just in product creation, but in making informed decisions about costs, pricing, and distribution.
For example:
- In the healthcare sector, a company might develop a new medicine that offers better results than existing options.
- In the personal care sector, companies like AXE revolutionise the way consumers view everyday hygiene products by introducing unique fragrances.
These businesses must address essential questions such as:
- What product should be developed?
- What are the production costs?
- How should the product be priced?
- How can expenses, such as salaries, marketing, and distribution, be managed?
Mispricing a product can lead to losses, while excessive discounting to compete in the market can harm long-term profitability. This is where the One-Third Framework offers a solid strategy for success.
What is the One-Third Framework?
The One-Third Framework is a financial strategy that divides business revenue into three key sections:
- Product Development Cost
- Business Operations Cost
- Profit Before Tax
By properly managing each of these components, businesses can maintain profitability, ensure operational efficiency, and support long-term growth. Let’s break down each section:
1. First One-Third: Product Development Cost
This includes all expenses related to the creation of the product, such as raw materials, packaging, labour, and other production costs.
For example, if a product is priced at AUD 100, then the production cost (the first one-third) should be around AUD 33. This cost covers ingredients, packaging, and labour needed to create the product.
2. Second One-Third: Business Operations Cost
The second third covers the ongoing operational expenses required to run the business, including:
- Salaries
- Rent
- Marketing
- Distribution costs (retailer and distributor margins)
These costs are essential for keeping the business running and ensuring your product reaches the market, both online and offline.
3. Third One-Third: Profit Before Tax
The remaining third is your profit before tax. After taxes are deducted, what remains is your net profit, which can either be reinvested into the business for further growth or saved for future needs.
Real-World Examples of the One-Third Framework
Here are a few companies that have successfully implemented this framework:
Example 1: Bajaj Consumer Care
- Total Revenue: AUD 935 million
- Product Cost: AUD 237 million (32%)
- Business Operations Cost: AUD 355 million (38%)
- Profit Before Tax: AUD 283 million (30%)
Example 2: Thyrocare
- Total Revenue: AUD 403 million
- Product Cost: AUD 109 million (26.4%)
- Business Operations Cost: AUD 167 million (40%)
- Profit Before Tax: AUD 138 million (33.4%)
Example 3: Naukri.com
- Total Revenue: AUD 1,271 million
- Manpower Cost: AUD 520 million (40.9%)
- Business Operations Cost: AUD 341 million (26.8%)
- Profit Before Tax: 32.3%
These companies have adhered to the One-Third Framework, keeping their product and business costs balanced to maintain profitability.
Why Use the One-Third Framework for Your Business?
1. Clear Benchmark
The framework offers a simple and effective financial structure to follow, providing a clear benchmark for your business.
2. Alignment of Team Goals
By following the One-Third Framework, your leadership team will be aligned with the same financial objectives, which improves focus on optimising both product and business costs.
3. Ensures Profitability
This framework helps ensure that your business remains profitable, making it easier to plan for growth and reinvestment.
4. Positive Cash Reserves
The strategy helps ensure that your cash reserves stay healthy, as it consistently delivers a portion of revenue as profit.
5. Quick Adjustments
If costs deviate from the expected one-third distribution, the framework allows for quick corrective actions, ensuring your business stays on track.
Implementing the One-Third Framework
For businesses, particularly in sectors like engineering design, adopting the One-Third Framework can optimise profitability and streamline operations. Balancing development costs with operational expenses, all while maintaining healthy profit margins, ensures that companies stay on track for growth and sustainability.
Whether launching a new product or managing ongoing operations, this framework provides a straightforward approach to achieving financial health.
By following the One-Third Framework, businesses can create a clear pathway to profitability and long-term success. Whether you’re developing a product or managing operations, this simple yet effective strategy ensures that operational costs and profits are balanced.