Quick reference
Key formula / structure
For each activity in the chain: profit = revenue × margin. Compare each activity's share of profit with its share of revenue.
Memory aid
Profit gathers where customers stop shopping around.
TL;DR
List every activity in the industry's value chain, from the customer's side. Estimate the industry's total profit, then each activity's revenue and margin, and reconcile the parts with the whole. Look for activities whose share of profit is far larger than their share of revenue, and ask why: usually the customer stops comparing prices there. Decide which activity to own and which to price as the way in, and name the sign that the pool is moving.
What Is Profit Pools?
A profit pool is the profit an industry earns, split across the activities of its value chain: making the product, selling it, financing it, insuring it, servicing it and so on. Orit Gadiesh and James L. Gilbert of Bain & Company introduced the idea in the Harvard Business Review in 1998. A profit pool map shows which activities earn a disproportionately large or small share of the industry's profit, so a company can see where the money is made, not only where the sales are.
There are many different sources of profit in any business, and the company that sees what others do not – namely, the profit pools it might create or exploit – will be best prepared to capture a disproportionate share of industry profits.
— Orit Gadiesh and James L. Gilbert, "Profit Pools: A Fresh Look at Strategy," Harvard Business Review (May–June 1998)
The usual way to read an industry is by revenue: who sells the most, and how fast the market grows. Gadiesh and Gilbert warned that this misleads. Revenue and profit can sit in different places, and a company that chases the revenue can end up "trapped in areas of weak or fading profitability." Their lead story is U-Haul. In the early 1990s it was barely breaking even on truck rentals, with older trucks and lower prices than its rivals, yet it earned a 10% operating margin against an industry average of less than 3%. The profit came from boxes, insurance, trailers and storage, sold after the rental was signed, when the customer had stopped shopping around. The core rental business was "the vast majority of the industry's revenue pool"; accessories "provided a large share of the industry's profit pool." The lesson generalizes into one practical question: at which point in the chain does the customer stop comparing prices? Competition thins there, and profit gathers. The map also has a weakness that matters as much as its insight: it is a photograph. The authors say a map "sheds light on how those concentrations might shift," and the shifts are where companies get caught.
Mapping a profit pool in four steps
Gadiesh and Gilbert's four steps, then the question that turns the map into a strategy.
Define the pool
List the value-chain activities in scope
Size the pool
Estimate the industry's total profit
Size each activity
Revenue and margin, activity by activity
Check and reconcile
Make the parts add up to the whole
Ask why, and what moves it
Where customers stop shopping, and for how long
Origin & context
Orit Gadiesh, then chairman of Bain & Company, and James L. Gilbert, a Bain director, published "Profit Pools: A Fresh Look at Strategy" and its companion, "How to Map Your Industry's Profit Pool," in the May–June 1998 issue of the Harvard Business Review. They wrote that "many managers chart strategy without a full understanding of the sources and distribution of profits in their industry," and offered a way to see how profits are distributed "among the various activities that form an industry's value chain."
Builds on: Michael E. Porter (1985), Competitive Advantage (the value chain, whose activities a profit pool is laid across); Orit Gadiesh and James L. Gilbert (1998), Profit Pools: A Fresh Look at Strategy, Harvard Business Review; Orit Gadiesh and James L. Gilbert (1998), How to Map Your Industry's Profit Pool, Harvard Business Review.
Profit Pools in action
U-Haul
Barely breaking even on trucks, and the most profitable company in the industry
In the early 1990s four companies fought over American consumer truck rental: U-Haul, Ryder, Hertz-Penske and Budget. U-Haul, the long-time leader, looked like the one losing. Its trucks were older, its maintenance costs higher and its prices lower than its rivals', and it was barely breaking even in truck rentals.
Its rivals priced their trucks to make money on the trucks. U-Haul saw that the rental was only the start of the job. The customer still needed boxes, insurance, a trailer and somewhere to store things, and once the rental agreement was signed, he stopped comparing prices. "Because there is virtually no competition in this piece of the value chain," Gadiesh and Gilbert write, "the accessories business enjoys highly attractive margins."
So U-Haul did two things. It took the cheapest storage space in key locations before its competitors could react, and it deliberately kept its daily truck rates low to bring in more customers for the accessories. The core rental business was the vast majority of the industry's revenue; accessories were a large share of its profit.
U-Haul was the most profitable company in the industry, with a 10% operating margin against an industry average of less than 3%. Ryder, the number two, left consumer truck rental, selling its fleet in 1996.
Charles Schwab
Giving away the trade to keep the cash, and then the cash moved
On October 1, 2019, Charles Schwab cut its trading commissions to zero. For a brokerage that sounds like giving away the business. It was not most of the business: Schwab's chief financial officer, Peter Crawford, said the cut would cost up to $100 million of quarterly revenue, about 4% of total net revenue.
The money was in the cash clients leave sitting in their accounts, which Schwab earns a spread on. Trading is the moment customers compare prices; idle cash is the moment they stop looking. In 2022, with interest rates rising fast, net interest revenue reached $10.7 billion, up 33% in a year, out of total revenue of about $20.8 billion. Stratrix's Take: that is U-Haul's move in a modern industry. The sources give revenue by activity, not profit, so the case shows where Schwab looked for the money rather than a full map of the pool.
Then the pool moved. Higher rates gave clients a reason to start shopping for their cash, too. In 2022 that sorting shrank Schwab's balance sheet by $115 billion, 17%, and in the first quarter of 2024 net interest revenue fell $537 million, about 19%, from a year earlier.
By the end of 2024 Schwab held a record $10.10 trillion in client assets across 36.5 million active brokerage accounts. The captive pool was still there, but it had shown its price: it stayed captive only as long as customers had little reason to shop.
Using it in the room
Use it early in a strategy review or before a big pricing, investment or acquisition decision, when the team is about to commit to a part of the industry. A first sketch fits in one working session; a full map takes weeks of data work.
Questions to ask
- ?Which activities does a customer pay for, from the first to the last, including the ones we do not do?
- ?Where does the customer compare prices, and where do they simply accept one?
- ?Which activity earns a far larger share of the profit than of the revenue, and why?
- ?Is our core product priced to make money on its own, or to bring customers to something more profitable?
- ?What would make customers start shopping at the step where they now stop?
The 30-minute version
Ten minutes to list the activities a customer pays for, start to finish. Ten minutes to mark, for each, whether the customer shops on price there. Fifteen minutes to estimate, roughly, each activity's revenue and margin from what the room knows. Five minutes to name the activity with the most profit for its size, and the one decision it changes.
Core Components
The boundaries
Decide where the value chain starts and ends for the decision at hand. The authors' first step ends with "a clearly defined list of the individual value-chain activities that make up your profit pool."
Example
For consumer truck rental: the rental itself, plus boxes, insurance, trailer rental and storage.
The size of the pool
Estimate the industry's total profit across all those activities, from company reports, industry data and estimates. This number is the check on everything that follows.
Example
The sum of operating profit across every company that earns money in the chain, including specialists who do only one activity.
Each activity's share
Estimate each activity's revenue and margin, and so its share of the profit. This is the hard part: as the authors note, financial data "are not reported in nice, neat bundles corresponding to each value-chain activity."
Example
A company that rents trucks and sells insurance reports one income statement; the analyst has to split it.
The reconciliation
Check the activity estimates against the total, and against what the largest companies report. If they do not add up, one of them is wrong.
Example
If the activity estimates add up to more profit than the industry reports, a margin assumption is too high.
The shift
Ask why the profit sits where it does, and what would move it: a new competitor, a regulation, a technology, customers who start to shop where they used to accept the price.
Example
The point at which a customer stops comparing prices today may not be the same point tomorrow.
When to Use Profit Pools
Choosing where to compete in a value chain
Problem it solves: The team is about to invest in the biggest part of the industry by revenue without knowing whether it earns any money.
Real-world application
A manufacturer sizes the service, financing and parts businesses around its product before deciding to cut the product's price.
Pricing the core product
Problem it solves: The core is priced to make money on its own, when it may be worth more as the way in to a more profitable activity.
Real-world application
U-Haul kept daily truck rates low to sell more boxes, insurance, trailers and storage.
Reading your own portfolio
Problem it solves: The business the company is named for may not be the one that earns its profit.
Real-world application
PepsiCo's 2024 annual report shows Frito-Lay North America generating 43% of total division operating profit, against 15% for PepsiCo Beverages North America.
Testing an acquisition or a new entry
Problem it solves: A target can look attractive on growth while sitting in the thin part of the pool.
Real-world application
Before an offer, the deal team maps the target's activities and asks which of them earn above-average margins, and why.
Walk through a customer's purchase step by step and mark the moments when they compare prices and the moments when they simply accept one. The second kind is where to look first.
How to Apply Profit Pools: Step by Step
Before you start
- →A decision the map will inform: where to invest, how to price, what to buy or exit
- →Revenue and profit data for the main companies in the chain, including specialists
- →Someone who knows how customers actually buy, step by step
Define the pool
List the value-chain activities relevant to the decision, from the first input the customer pays for to the last. Decide where the chain begins and ends.
Tips
- ✓Include the activities your company does not do; the money is often there
- ✓Draw the chain as the customer experiences it, not as your organization chart does
Common mistakes
- ✗Drawing the boundary around your own business only
Estimate the pool's total size
Estimate the industry's total profit across those activities, from company reports, industry data and analysts' estimates.
Tips
- ✓Start with the largest companies and specialists, then estimate the rest
Common mistakes
- ✗Using revenue as a stand-in for profit
Estimate each activity's revenue and margin
Split the pool by activity. For each one, estimate revenue and operating margin, and so its share of the profit.
Tips
- ✓Use specialist companies that do only one activity to calibrate margins
- ✓Record every estimate and its source so it can be challenged
Common mistakes
- ✗Assuming each activity earns the company-wide average margin
Check and reconcile
Make the activity estimates add up to the total, and test them against what the largest companies report.
Tips
- ✓When the parts and the whole disagree, find out which is wrong before moving on
Common mistakes
- ✗Forcing the numbers to match by adjusting the activity nobody can check
Ask why the profit sits where it does
For each activity with a large share of profit, write down why: where customers stop comparing prices, who has little competition, what regulation or habit protects it.
Tips
- ✓Ask what would make customers start shopping at that step
Common mistakes
- ✗Treating the map as permanent
Turn it into a choice
Decide which activity to own, which to price as the way in, and which to leave. Then name the early sign that the pool is moving.
Tips
- ✓One move and one sign to watch beat a map with no decision on it
Common mistakes
- ✗Presenting the map and stopping there
Showing the result
One chart: each activity in the chain as a column, its width the share of industry revenue and its height the operating margin, with your company's position marked. One line under it: the activity with the most profit for its size, why, and the decision it changes.
On the slide
- ✓Every activity a customer pays for, including those you do not do
- ✓Revenue share and margin for each, with sources
- ✓The reason the tallest column is tall
Left off
- ✕Precise figures the data cannot support (show ranges)
- ✕Activities that do not affect the decision
- ✕The full data workings (put them in an appendix)
Value & Outcomes
Primary benefit
It shows where an industry's money is made, which is often not where its sales are, so a company can aim at the profit rather than the revenue.
Additional benefits
- ✓Shows when the core product is worth more as a way in than as a profit center
- ✓Points to activities a company does not yet do but should
- ✓Explains why a smaller rival can be more profitable
What you'll learn
- →How to draw the boundaries of an industry's profit pool
- →How to estimate profit by activity when no one reports it that way
- →How to find the point where customers stop comparing prices
Typical outcomes
Best Practices
📋 Preparation
- •Tie the map to one decision before building it
- •Walk the customer's purchase from start to finish to list the activities
- •Collect data on specialist companies, not only integrated ones
🚀 Execution
- •Estimate revenue and margin separately for each activity
- •Keep every assumption visible, with its source
- •Reconcile the parts with the whole
🔄 Follow-Up
- •Write down why each profitable activity is profitable
- •Name what would move the pool, and watch for it
- •Redraw the map when a regulation, technology or price changes
💎 Pro Tips
- •Look hardest at the moments when customers stop shopping around
- •A wide, short column is a big business with little money in it
- •Ask which activity a rival is pricing low on purpose, and what it sells next
The profit sits where it does for a reason, and reasons change. Write down why each tall column is tall, and what would have to happen for it to shrink.
Limitations & Pitfalls
The data rarely exist in the right shape. Companies report by segment, not by activity, so much of the map is estimated.
Mitigation: Show the estimates and their sources, and test the conclusions against a range of assumptions
It is a snapshot. Profit gathers where competition is thin, and competition does not stay thin.
Mitigation: For each profitable activity, write the reason it is profitable and the event that would end it
It shows where profit is, not whether your company can capture it.
Mitigation: Pair it with an assessment of your own capabilities and the cost of entering each activity
Drawing the boundaries is a judgment. Draw them too narrowly and the most profitable activity is left off the map.
Mitigation: Draw the chain from the customer's side and include activities done by other industries
What comes before and after
Run first
Lists the activities the profit pool is laid across.
Sets out who competes and how before you map where the money sits.
Run next
Explains why the profitable activities are profitable, and how long that may last.
Tracks how profit moves from one part of an industry to another over time.
Where this comes fromOrit Gadiesh and James L. Gilbert (Bain & Company) introduced this (1998).
Sources & further reading
- Orit Gadiesh and James L. Gilbert (1998). Profit Pools: A Fresh Look at Strategy. Harvard Business Review (May–June 1998).The authors, their roles at Bain & Company, and the issue.
- Orit Gadiesh and James L. Gilbert (1998). Profit pools: A fresh look at strategy (Idea in Brief). Bain & Company.The U-Haul case: the 10% operating margin against an industry average of less than 3%, Ryder's 1996 exit, accessories and the revenue and profit pools.
- Orit Gadiesh and James L. Gilbert (1998). How to Map Your Industry's Profit Pool. Harvard Business Review (May–June 1998); Idea in Brief on Bain & Company.The definition, the four steps, and the problem with revenue-focused strategy.
- Quartz (2019). Charles Schwab is cutting brokerage fees to zero, but that doesn't mean it's free. Quartz, via RBLT (October 1, 2019).The cut to zero; up to $100 million of quarterly revenue, about 4% of total net revenue.
- The Charles Schwab Corporation (2023). Fourth Quarter and Full Year 2022 Financial Results, Exhibit 99.1 to Form 8-K. U.S. Securities and Exchange Commission (January 18, 2023).Net interest revenue of $10.7 billion, up 33%; total revenue of about $20.8 billion; balance sheet down $115 billion, 17%.
- The Charles Schwab Corporation (2024). Form 10-Q for the quarter ended March 31, 2024. The Charles Schwab Corporation (May 9, 2024).Net interest revenue down $537 million, about 19%.
- The Charles Schwab Corporation (2025). Annual Report on Form 10-K for 2024. The Charles Schwab Corporation (February 26, 2025).$10.10 trillion in client assets; 36.5 million active brokerage accounts.
- PepsiCo, Inc. (2025). Annual Report on Form 10-K for fiscal 2024. U.S. Securities and Exchange Commission (February 4, 2025).Frito-Lay North America 43% of total division operating profit; PepsiCo Beverages North America 15%.
More Management Frameworks
Other frameworks in the Stratrix library.
PESTEL Analysis
A macro-environmental scanning framework that examines Political, Economic, Social, Technological, Environmental, and Legal factors to understand external forces shaping business conditions.
Strategic Analysis7 Powers
7 Powers names the seven ways a business can earn more than its rivals for years, not quarters. Its test is strict: an advantage counts only when it pays and when something stops rivals from copying it. A great product that a rival can match is not a power.
Strategic AnalysisScenario Planning
Scenario planning tests a strategy against three or four plausible futures instead of one forecast. It does not predict which future arrives. Its use is to find the bet a plan cannot afford to lose, while there is still time to hedge it.
Strategic AnalysisBCG Growth-Share Matrix
The BCG growth-share matrix plots a company's businesses by market growth and relative share, sorting them into stars, cash cows, question marks and dogs so leaders can decide where the portfolio's cash should go next.
Strategic AnalysisAnsoff Matrix
The Ansoff matrix sorts growth into four paths: market penetration, product development, market development and diversification. Each step away from today's products and customers adds risk, but the risk sits in what the company must learn, not in the box.
Strategic AnalysisSWOT Analysis
A strategic planning framework that evaluates an organization's internal Strengths and Weaknesses alongside external Opportunities and Threats to inform decision-making and strategy formulation.
Tools to try
- Five Forces scorerFramework: Porter's Five Forces
- Ansoff move finderFramework: Ansoff Matrix
- SWOT builderFramework: SWOT Analysis
- Business model canvas builderFramework: Business Model Canvas
- Change readiness checkFramework: Kotter's 8-Step Change Model
- SMART goal builderFramework: SMART Goals
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