Operations
Profit pool
The total profit earned across an industry, and how it splits between steps of the value chain.
Facts checked against sources onWhat does Profit pool mean?
A profit pool is the total profit earned by all companies in an industry, mapped across the steps of its value chain or across segments. The idea was set out by Orit Gadiesh and James Gilbert of Bain in a 1998 Harvard Business Review article. Its main point is that revenue and profit often sit in different places. In their example of the US car industry, making and selling cars brought in most of the revenue, while leasing, insurance and car loans earned a much larger share of the profit than of the revenue. Mapping the profit pool shows where to compete, where to integrate and where a new entrant could take share. Example: if an industry earns 100 of profit and one step with 20 percent of revenue earns 45 of it, that step is where the value is.
Where does it come up in case interview prep?
Related terms
- Value chainThe activities a firm performs to create and deliver value.
- MarginProfit on a sale, as an amount per unit or as a percent of price.
- Vertical integrationOwning more stages of your own supply chain.
- Porter's Five ForcesFive pressures on how profitable an industry is; vocabulary, not a case structure.
- BottleneckThe slowest step, which limits the output of the whole process.
- Capacity utilizationActual output as a share of the most that could be produced.
- Little's lawItems in a system = arrival rate × time each item spends in it.
- Inventory turnoverHow many times stock is sold and replaced in a year.
Learn it in context
See Profit pool at work in a lesson from How industries work: the toolkit, with checks as you go.
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