One-Third Framework Will Help You Run Your Business
Many entrepreneurs start businesses but often lack complete knowledge of the products they sell or their intricate details. Understanding both your product and its market positioning is essential to growing a successful company, particularly for product-focused businesses. At KEVOS, we believe in providing clarity and support to help businesses manage these challenges, especially within the engineering design sector.
The Importance of Product Understanding
A product company is any business that brings new developments to the market—whether it's a new oil, soap, medicine, or any other tangible solution that addresses a customer problem. The challenge for product companies is not only creating a product but also making strategic decisions about costs, pricing, and distribution.
For example:
In the medical industry, if existing cough syrups aren't effective, a company might launch a new one with better treatment capabilities.
A deodorant company, like AXE, brings unique fragrances to the market, revolutionizing the way consumers perceive daily hygiene products.
These companies must answer key questions:
What product should be made?
What should the cost be to produce it?
How should it be priced?
How do we manage expenses, including employees, marketing, and distribution?
Managing these factors correctly is crucial to staying profitable and ensuring distributors and retailers are motivated to sell your product. Mispricing can lead to financial losses, and over-discounting to compete in the market may hurt long-term profitability. This is where the One-Third Framework becomes a powerful tool for success.
What is the One-Third Framework?
The One-Third Framework is a simple yet powerful financial strategy that divides your business revenue into three key parts:
Product Development Cost
Business Operations Cost
Profit Before Tax
By managing each of these components properly, businesses can maintain profitability, ensure operational efficiency, and sustain long-term growth. Let's explore each section in detail:
1. First One-Third: Product Development Cost
This includes all the costs associated with making your product—such as raw materials, packaging, labor, and other production-related expenses.
For instance, if your cough syrup is priced at AUD 100, then the production cost (the first one-third) should be around AUD 33. This includes the cost of the liquid ingredients, bottles, caps, wrappers, and labor.
2. Second One-Third: Business Operations Cost
The second one-third covers all the business expenses needed to run your operations, including:
Salaries
Rent
Marketing
Distribution costs (margins for distributors and retailers)
These operational costs are crucial for keeping the business functional and ensuring that your product reaches the market through proper channels, both offline (through distributors) and online (via platforms like Amazon).
3. Third One-Third: Profit Before Tax
The final one-third of your revenue is your profit before tax. After taxes are deducted, what remains is your profit, which can be reinvested into the business for growth or saved as a reserve for future needs.
Real-World Examples of One-Third Framework in Action
Here are some examples of well-known 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%
Each of these companies adheres closely to the one-third framework, maintaining profitability by ensuring product and business costs take up two-thirds of their revenue, leaving one-third for profit.
Why Use the One-Third Framework for Your Business?
1. Clear Benchmark
The One-Third Framework sets a clear benchmark for your business, providing a simple yet effective financial structure to follow.
2. Alignment of Owner and Managers
With everyone working towards the same financial goals, your leadership team stays aligned and focused on optimizing both product and business costs.
3. Ensures Profitability
By adhering to the framework, you know you will earn profits, making it easier to plan for future growth and investment.
4. Positive Cash Reserves
This structured approach ensures that your cash reserves remain positive, as it consistently delivers a portion of revenue as profit.
5. Quick Decision-Making
If your costs begin to deviate from the one-third framework, you can quickly adjust your strategy to ensure you stay on track.
Implementing the One-Third Framework at KEVOS
At KEVOS, we encourage small and medium-sized businesses to adopt the One-Third Framework to improve profitability and streamline their operations. Whether you are launching a new product or managing ongoing business operations, this framework provides a clear and actionable way to ensure financial health.
For businesses in the engineering design and drafting space, the One-Third Framework can be particularly valuable. It helps balance development costs, such as CAD modeling and prototyping, with ongoing expenses like marketing and client management, all while maintaining a healthy profit margin.
If you're ready to transform your business with this strategy, KEVOS is here to help you implement the One-Third Framework, optimize costs, and build a successful, sustainable business.
By following the One-Third Framework, you'll have a clear pathway to profitability and long-term success. Whether you're developing products or managing engineering projects, this simple strategy ensures that you optimize both your operational costs and profits.
Need more guidance on business strategies or engineering solutions? Contact KEVOS today, and let us partner with you on your journey to success!