Revenue Drives a Business (But Not All Revenue Is Created Equal).
Revenue drives a business. Without it, you have no business. But not all revenue is created equal. And not all revenue growth is manageable. And if the revenue is not driving profit, it doesn’t matter whether it’s growing or manageable. It won’t create value, and value is really what building a business is all about. Without it, you just have a job and a bunch of folks you’re paying.
So, what’s the answer?
Revenue drives profit, profit builds value. That is the essence of small business success. But while it seems so obvious…it’s not so easy to do. But at its foundation is revenue. Let’s explore five ways that revenue can create that value:
- Recurring Revenue
Develop products and services that can be delivered and billed on a recurring basis. Whether that be a SaaS (Software-as-a-Service) model or simply billing for your product or service on some consistent periodic basis. It smooths revenue and therefore, the collections, making cashflow more predictable. Further, though, it usually spreads the cost, often, over multiple customers, making the product or service more profitable. And that profit builds value.
- Multiple Revenue Sources
Have multiple revenue sources that are based on selling more products or services into an existing customer base and using them to expand that customer base by adding new customers. Use one product as a lead-in to another. Further, selling into an existing customer is way more efficient and cost-effective than finding and selling a new customer. However, a word of caution, more is not better it is only more. Each product must stand on its own, in terms of customer profitability, and it must deliver profit on a consistent basis to drive value.
- Multiple Revenue Channels
Wherever possible, find sales outlets beyond your own internal sales force, especially to break into new markets, both vertical and geographic. Find partners in those markets and drive a “one to many” strategy where you leverage the partners’ sales forces to re-sell your products and services. They get access to proven revenue generating products but bear the cost of customer acquisition and support. You “wholesale” the product to them and give them the opportunity for their own packaging and pricing. You reduce the cost of sales and delivery, thereby increasing overall profit and, in turn, creating value.
- Continually Review Product Profitability
Speaking of product profitability, you should be reviewing product profitability at least twice per year, if not more often, so you know exactly where you make money. Don’t be afraid to raise prices, especially if you are a market leader in a niche and/or you haven’t raised prices for several years. Most everything costs more today than it did multiple years ago, so most customers will understand. And that increase goes right to the bottom line. Also, as important, review cost of goods. Because if that is creeping up over time, that can be a killer to profitability. Are your support costs for your products or services increasing because of internal quality issues? Or if you are re-selling features or specific products, have support costs increased because the supplier’s prices to you have increased or their product quality is slipping?. Or it just may be time to get rid of unprofitable products, whether internal or external because they will, ultimately drag down your value.
- Continually Review Customer Profitability
As with product profitability, you should review customer profitability, at least, twice a year. And you should establish criteria for customer profitability because some of it is a little subjective. And it’s a little trickier because you have to track support calls, discounting, etc., that each customer is requiring. You should talk to your sales and support folks, to see if their opinions support the data. And, sometimes, it’s simply that you have to “fire the customer,” because they’ve become unprofitable because they are either too demanding, or too tough to deal with for a small amount of revenue. Granted a hard call to make, but, usually, they fire themselves by becoming not worth the effort to sustain the relationship relative to the revenue and profit. In that sense, they are losing you money; taking away from the value you are trying to build.
“The Entrepreneur’s Yoda” knows these things. He’s been there. May success be with you.