It might seem like, on the surface, that all revenue is the same. But in reality, when you dig deep down and analyze where that revenue is coming from, what that revenue is attributed to and who that revenue is attributed to, you quickly find many types of revenue. In fact, there might actually be good revenue and not-so-good revenue.
Private equity firms typically look at the sources of revenue (like products vs. services or the mix of product revenue) when they do their due diligence, but they don’t always distinguish between the differences in revenue quality that comes from an inbound marketing lead and revenue that comes from a sales-generated lead.
In this article, I’m going to attempt to help you understand the differences in quality and explain how to assess your company based on the quality of revenue.
Your business is already attracting people. But are those the right people? Your sales team is selling your products and services right now. Are your salespeople thinking about whether they’re talking to the right types of companies, or are they thinking about their sales target and bonuses? All revenue is not created equally.
If you’re executing marketing with a 2018 approach, then you have a detailed persona profile. You might have a number of detailed persona profiles depending on how diverse your approach to the market is right now. I’d encourage you to keep those profiles down to the low single digits, because trying to be everything to everyone is the fast track to disappointing results. A laser can cut through concrete with the same energy required to light up a room. You want to have a laser focus.
You might be getting revenue from the wrong types of people or companies, revenue that might be difficult to retain down the road, revenue that will be challenging to grow with you as your products and services expand or revenue that might be in a market that is shrinking instead of expanding. All revenue is not created equally.
Getting your company aligned around who you want to attract and sell to is one of the key revenue growth tactics that is often overlooked in most businesses. Click here to learn a little more about personas and how they drive revenue growth strategy.
If 50% of the new customers you signed last month require so much servicing or hand-holding that you lose money or, more realistically, you miss your profit margin targets, this is low-quality revenue as well.
This might not show up in standard reports. Instead, it might look like a downward trend in company profitability, but the issue is not with your ability to service or your operation. This issue is with the new customers you’re signing. The quality of new revenue is low.
If your typical customer stays with you for five years, but these new customers leave after just six months, this is also low-quality revenue. You’re investing a significant amount of time and money up front to get these customers in the door and then not realizing your return on that investment because the lifetime value of those new customers is below historic averages. The quality of this new revenue is low.
When it comes to quality of revenue, all revenue is not created equally, because there is a cost of acquiring new revenue. If it costs you $20,000 to get a new client, that’s not sustainable. Even though you’d be bringing on new revenue, the cost would quickly produce a business model that is not sustainable. Do you know how much it costs you, on average, to bring on a new customer?
You need to know that number and you also need to know what you’re doing to actively bring it down. If you have a direct sales force with sales management, those expenses need to produce a lot of revenue to offset the costs. If you’re using more of an inbound approach, where people find you and then you have a team of closers, that cost to acquire number might be lower. One isn’t good and the other isn’t bad, but they are different and you should know the differences.
Regardless of approach, this number should be going down over time. As your marketing gets dialed in and/or as your sales team gets better, both should execute more efficiently and lower your cost to acquire new revenue.
If all revenue is not created equally, then revenue from different sources is going to be valued differently, too. Revenue from trade shows vs. revenue from site conversions and revenue from direct sales efforts vs. revenue from current customer referrals — these are all going to have different values associated with them. If most of your new revenue is coming from direct sales efforts, that tells you something. If much of your new revenue is coming from current client referrals, that tells you something different.
When you’re assessing the quality of new revenue, this is something you need to know. Clearly the cost of referral revenue is going to be lower than the cost of direct-sales-generated revenue. Revenue from customer referrals would also highlight a positive customer experience as opposed to the situation where no revenue is coming from customer referrals — that might indicate a service challenge in hiding.
It’s important to look at all of the sources and identify the percentages of revenue from each, as well as the cost of acquiring revenue from each channel. Then you should be looking at lifetime value of the channel. Which channels produce the best revenue, feature the clients who stay the longest and spend the most, and have clients who provide the most referrals that become new customers?
This type of analysis isn’t easy to deliver. It typically requires data from your CRM, marketing automation software and company financial systems. You’re going to need payroll and full burdened cost data on the team working on any aspect of revenue. You’re going to need all the expenses associated with marketing and sales-generated revenue. You’re going to need source data on all new leads coming into the company, including internal source data.
The good news is that getting the data is usually the biggest task. Once you get the data, sorting through and identifying the value of each source of revenue isn’t too difficult. When you get through synthesizing the data, some of the common insights include:
The bottom line is not all revenue is created equally, and as a CEO, business owner or company leader, you should know the quality of your revenue. It can be a predictor of future success and company health, but more specifically, it can show you where you need to double down, shorten up and focus your investments to drive profitable revenue growth even faster.
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