July 22, 2011

I recently had dinner with a good friend whom I hadn’t seen in 18 months. A fellow entrepreneur, he surprised me with the news that he had started a new company in the energy sector, far different than has previous company in technology. After speaking at length about the transition and the challenges of his previous venture, it was clear to me that this transition was a perfect example of a concept I had analyzed recently as a Fellow at the Kauffman Foundation’s Education Ventures Program: the trade-off between resonance and profitability.

Resonance and profitability in business

I’m a firm believer in using frameworks to analyze business problems. A framework gives structure to problems, integrates different types of information and lets you see your business from a different perspective. The resonance versus profitability framework is useful for understanding at a very high level what future awaits your company. I have recently made important changes to my business based on what I learned through this framework.

The term resonance has different meanings depending on the context. When I refer to resonance in a business context, I’m referring to how well-received your products are among current and potential customers and how well your offering satisfies the “wants” for which your customers are willing to pay.

There is no need to define profitability. We all know what that means! The challenge lies in understanding the relationship between resonance and profitability and then using this information to make decisions about which direction your company should take.

The resonance versus profitability matrix

The best way to use this framework is to create a four quadrant matrix, dividing resonance and profitability into high and low:

Think about your entire business and plot where it lies on this matrix. If you have multiple lines of business then plot each one separately.

Using the matrix to make strategic decisions

The resonance versus profitability matrix can be used to help you understand where your company is today and where it should be in the future. There are four options:

High profitability, high resonance

If your company is in this quadrant then you should celebrate. This is the type of business that can grow quickly, generate large amounts of cash flow and is valued at a significant premium to competitors. Don’t spend too much time celebrating though; you have to make sure that your company doesn’t slip into another quadrant.

Low profitability, high resonance

This is the second best position on the matrix. Companies in this quadrant have great relationships with their customers and understand their market well but they make a small margin on what they sell. This quadrant can be labeled the “wasted opportunity box”.

Leveraging the high resonance, companies in this quadrant can develop higher margin products and services to increase their profitability. Service contracts, training programs and other high profitability items can be added to existing products.

High profitability, low resonance

Many companies end up in this quadrant because they fail to adapt to changes in their customers’ needs. This isn’t a quadrant where companies stay for long. The lack of resonance over time leads companies to lower profitability as other companies with more resonance take business away from you. Unless a business takes proactive steps to enhance resonance, there is only place to go…

Low profitability, low resonance

If your company is in this category, it’s time for a radical change. You need to ask yourself if your company should even exist. If you have a difficult time connecting with your customers (low resonance) and the few times you are able to make a sale the margin is minimal (low profitability), then you need to change your product offering, seek new customers or close your doors. Few entrepreneurs start a business in this quadrant, but many wind up here.

What do you think about this matrix? Have you used it to analyze your business? Did you learn anything new? Share your thoughts in the comments section below.

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Join the conversation ( 1 )

• Accomplish 10 months ago

  

  Interesting post. We haven't use it to analyze our business, but do understand the very basic importance of taking time off on a regular basis to look at where your business is at. That said, I'm loving the idea of breaking it down into something more visual. May have to try this out!