Turning cost centers into profit opportunities

Typically, when companies offer new products or services, they do so either as a defensive play, to protect existing business, or as an opportunity for growth. However, one area of opportunity is to take a product development view on creating new revenue out of an area of your business that traditionally is just a cost center. The idea of turning cost centers into revenue opportunities is something we have been exploring at Bark & Co. Several of our teams, ranging from content marketing for promotional events to customer service, are now running as independent business units with their own P&L. This allows us to scale the teams faster, compensate the staff better, and build better tools for our core business. Our promotional events team at BarkBox.com has been turned into BarkLive, a set of paid-for dating events for dogs and their parents. Another example is what in other firms would be called a traditional content marketing team. At Bark & Co., our content marketing team has morphed into BarkPost.com. This is now a very fast growing media property, which not only provides value to our core business, BarkShop.com, but also sells sponsorships to external established advertisers, ranging from Sony to Roomba to Tito’s vodka.

Larger companies should explore this type of innovation too, turning their domain specific tools and processes into new products that can be sold to the industry at large or offered to their existing customers. This method is, if nothing else, a very effective way to reduce costs. The approach is not necessarily new; several tech companies have been doing this kind of innovation and have stumbled into opportunities that turned out to be much bigger than their original core businesses. There are several famous examples of this. The photo sharing service Flickr was originally a simple productized version of a tool that was used in a computer game, while PayPal was developed as a tool to showcase Palm Pilot Payment. In both cases, the marketing site ended up being a much bigger business than the original product.

The latest example (outside Prehype and Bark & Co.) that I have seen is what Jeff Bezos is doing with the Washington Post. According to the Financial Times, the Post plans to sell its back-end content-management system (CMS) to local and regional newspapers.

Why is this so interesting?

Because it shows that you can turn what is usually a cost (buying/building software) into a revenue opportunity. New revenue can be extracted not just by monetizing content (the traditional core offering for the WP), but also by productizing the process or tools used to generate content.

Making these core tools a profit opportunity will allow Bezos to allocate more resources (talent and capital) towards those tools, which will make them better and result in the development of better content for the Washington Post.

So the question is, what other cost center’s could larger companies turn into profit makers (events, research, financial reporting tools)? At Prehype, where we co-create new ventures with large companies, we will certainly be looking more at this area in 2015 and will try to find opportunities not just in an organization’s core offering but throughout the whole value chain.

More on this can be found http://twitter.com/werdelin