What in the world is a “World Class Purpose Model”?

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One of the "golden rules or the litmus tests" investors apply before investing in a firm is the sustainability of its business model (or) the ability of its business model to make money for the long haul. As a matter of fact, investors value the business model more than anything else (even more than the financial plan itself) as– at the end of the day – a sound business model is the one that is going to guarantee the sustainable value or return for their investment. Speaking of this sustainable value/return – most recently, investors also have come to grips with the reality that long term value is not just achieved by the money making guarantee of the business model - but also, by the purpose criteria (KLD scores, sustainability indices, corporate governance scores etc) on top of the profit metrics - as outlined in one of my earlier blogs. In other words, these purpose criteria enabled business models are the ones that is going to give the sustainable value for the investors (& to all the other stakeholders/society alike) as opposed to the mere profit metrics based business models - and I call them as purpose models (http://strategywithapurpose.blogspot.com/2010/06/purpose-driven-strategy.html) as they re-purposes the vision/mission/value/BHAG of the firm within the context of the cross border industry boundaries with a 3P (people, planet and passion) based purpose mindset.


Within the context of this renewed purpose inspired thinking – it is equally important for business models to have a balanced purpose/profit formulas to qualify itself as a purpose model- as corporations are not in the business of running charities. In other words, purpose models must augment the “value based purpose metrics” with “cash flow based profit metrics” to position the firm on a solid ground for the long term sustainable success to further qualify it as the world class purpose model. Speaking of a world class purpose model – we are going to come up with two more complimentary metrics (one for profit and one for purpose) to help investors to evaluate whether a given purpose model can qualify as a world class purpose model.


With the fact that “cash is the king” in today’s business context – we have chosen “operating leverage” as the key measure to assesses the overall health and wellness (& risk level) of the purpose model and to qualify whether it can become a world class purpose model from profit sustainability standpoint. Similarly, with our mantra being “purpose is the queen” – we have chosen “purpose leverage” that assesses the overall purpose and values (& tolerance level) of the purpose model and to qualify whether it can become a world class purpose model from purpose sustainability standpoint.


Operating leverage in my mind is the relationship between fixed and variable cost – the higher the operating leverage, higher the cash flow and vice-versa. In other words, those purpose models with a higher operating leverage and lower marginal cost are the world class purpose models from profit sustainability standpoint. A quick degree of operating leverage (DOL) measure, which shows the extent to which operating profits change as sales volume changes can be calculated as outlined below . More specifically, DOL is the percentage change in income (or EBITDA) divided by the percentage change in the sales output.

DOL = (Q (P-V))/ (Q (P-V) – F)

Q= Quantity produced or sold
V=Variable cost per unit
P = Sales Price
F=Fixed Operating Costs

So, higher the DOL leverage, higher the change in operating profit and better the purpose model is. In other words, in actual numbers, let us say we have a purpose model with a DOL index of 2 along with a 25% change in sales volume - the potential change of operating profit for this purpose model will be 50% (2*25%), a great number, which will definitely make it as a world class purpose model from profit sustainability standpoint.

Purpose leverage, on the other hand, is the relationship between fixed and variable emotional equity – the higher the purpose leverage, higher the emotional attachment of the stakeholders (consumers, investors and suppliers) to the firm and vice-versa. In other words, those purpose models with a higher purpose leverage and lower emotional equity cost are the world class purpose models from purpose sustainability standpoint. A quick degree of purpose leverage (DPL) measure, which shows the extent to which purpose inspired profits change as sales volume changes is can be calculated as outlined below from purpose sustainability standpoint. Specifically, DPL is the percentage change in income (or EBIT) due to the purpose inspired emotional equity divided by the percentage change in the sales output.

DPL = (Q (P’-V))/ (Q (P’-V) – F)

Q= Quantity produced or sold
V=Variable cost per unit
P’ – Purpose inspired marked up premium sales price (i.e. higher sales prices consumers are willing to pay for the super premium products/services because of the firm’s purpose agenda or their emotional attachment/equity to the brand or firm. For example, a Health and Wellness/Green minded consumer will be willing to pay higher price when they know that the firm’s purpose align with their personal purpose/values.
F=Fixed Operating Costs

So, higher the DPL leverage, higher the change in operating profit and better the purpose model is. In other words, in actual numbers, let us say that we have a business model with a DPL index of 5 along with a 10% change in sales volume - the potential change of operating profit for this purpose model will be 50% (5*10%), a great number, which will definitely make it as a world class purpose model from purpose sustainability standpoint.

Bottom line: As represented in the justice model picture at the top of the page, the DPL-DOL balanced purpose model that gets us the repeat customers - where the cost to deliver incremental products/services for an incremental customer approaches almost zero, where the cost needed to bind additional customer’s emotional equity to the firm’s brand approaches almost zero, and where we get a lots of the cash up front and where we have lots of good will and emotional equity on the purpose bank—is what makes a purpose model a world class purpose model. What more can we ask for?