Profit Centers vs. Cost Centers

Mike Wolfe -

The distinction between cost centers and profit centers is a fundamental business concept popularized by management guru Peter Drucker.

Profit centers are the parts of a company responsible for generating revenue. They represent a company's income stream.

Cost centers, on the other hand, represent expenses. They do not directly generate revenue, but provide support and infrastructure to the profit centers.

The Goal is to Maximize Net Profit

Both profit centers and cost centers affect a company's bottom line, which is represented by its net profit.

To increase net profit, you must either:

  • Increase revenue from profit centers
  • Reduce expenses from cost centers

There is no cap on how much additional revenue profit centers can generate. However, you can only reduce expenses from cost centers to $0.

Profit Centers Present Bigger Opportunities

Boosting profit centers is high-risk, high-reward.

Many unpredictable factors affect revenue generation:

  • How good is the marketing campaign at attracting eyeballs?
  • How good is the landing page at getting visitors to take the call to action?
  • How good is the salesperson at closing the deal?
  • How good is the product or service itself?

Your software can triple the effectiveness of any one of the above factors, but if there is a weak link in the chain somewhere else, the company will never realize the full potential of your help.

However, because there is no cap on revenue, a successful initiative in a profit center can increase net profit exponentially.

Cost Centers Offer More Predictable Outcomes

Reducing cost centers is low-risk, low-reward.

It's straightforward to calculate potential savings from expense reductions.

  • Completing a manual expense report form takes one hour.
  • 200 employees must complete the form every month.
  • On average, each employee man-hour costs the company $50.
  • The annual cost of these reports is 1 × 200 × 50 × 12 = $120,000.
  • If we reduce the time to a half hour, we save the company $60k per year.
  • If we reduce it to fifteen minutes, we save the company $90k per year.
  • Yet, even if we reduce it to zero, the most we can save the company is $120k per year.

The rewards are more modest, but also more predictable.

Most Access Apps Support Cost Centers

Most line-of-business Access applications reduce expenses in cost centers rather than boosting revenue in profit centers.

However, keep an eye out for opportunities to support profit centers. These projects can be extremely lucrative, especially if you use value-based pricing and can effectively communicate the value your solution brings to an organization.

Additional Reading

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