Exxel > Services > Business Plans > Revenue Formula, Key #2
In this document
The Revenue Formula that
Investors want to See
“We put money in here.
Revenue comes out over
company, the Revenue Formula is perhaps the most substantial of the keys to such funding. Just after Vision, it is the most important key as presented in our “10 Keys to a Business Plan that Gets Funded.”
“Next quarter the sales and marketing budget increase of $100,000 will lead to a increase of quarterly revenue by $400,000. From that $400,000 the normal ratio of 22% for sales and marketing will both sustain it and grow at a slow pace.”
From where you are Now
From what you know right now, how much revenue would a $100,000 one time budget increase generate at the organization you evaluate? $200,000 or $800,000? Does the new revenue throw off enough cash to keep reinvesting budget dollars, to make that new revenue become perpetual? Is it so much that it can even fund some growth? If you changed the initial number from $100,000 to $300,000, what then? Is there enough of an untapped audience?
The measurement and experiments will show you more clearly the causes of revenue. In many cases, you’ll see a given sale was influenced by 3 or 4 experiences like an article or a visit at a trade show in addition to their sales contact. That just makes the formulas more detailed.
Look at the details about almost any company. Looking for the "right issues", the potential for more growth and for a higher return on marketing money is almost always huge. Talk with us for 10 or 20 minutes and we are likely able, in that short time, to generate ideas that make sense to you, that would grow revenue substantially with no additional budget or risk.
In any company, there are different products and services, different channels of distribution, different geographic, ethnic or demographic audiences. Consider each combination. Consider each set of best practices or even the standard of effective practices for each measurable process. Combine this writer’s experience with those of two other revenue generation experts. It covers over 100 cases all had $3 million to $100 million in annual revenue. 80% had substantial hidden potential, often an existing 10% annual growth rate was lifted to over 50%.
Find the Potential, with Exxel taking the Risk
In most cases, we’ll do enough of an audit and process exploration to show such potential entirely at our risk.
Can a simple, easy set of changes generate major improvements? Here are some examples to consider:
· a change to packaging can increase repeat buying
· some leads cost five times as much to generate as others,
· good leads do not always get followed up,
· a change to the sales commission plan can increase revenue without increasing costs,
· additional methods can add at least 20% and
· method process improvement usually more than another 20%. Often existing costs can have a small portion redeployed to generate the improvements, with no budget risk.
‘Methods,’ among the spectrum of revenue generating methods start with low price products using sampling, tv commercials, and product tie-is and at the other end, with large ticket organizations.
· decent and simple measurement systems can cost almost nothing and result in major cost improvements,
· intelligent procedures have been dropped and can be put back in place. Lead follow-up is one place to look. It is at many organizations either dropped or done wrongly if not frequently inspected or regularly measured.
Consider their point of view or the way that investors look at the issues. You are on the Board.
Before: We need an extra $1 million of budget next year. Revenue a year later will be up $5 million.
Q: Where will you spend that million?
A: Sales and Marketing will get $700,000. The rest will finance growth of the balance sheet and some capital equipment.
A: Not as much. Probably only about 1 million.
After: We have done a lot of measurement and some testing. We have results to share with those who are interested.
A: a one time $500,000 increase, a hit to earnings spread equally across 2 quarters will generate $2.5 million per year in revenue. That’s a permanent annual increase of 2.5. Over 80% of the increase will be in place within 7 to 9 months of the time that we start spending.
The process being used is refreshing to see. It uses methods, scripts, ads and training systems. The bulk of the effort front ends today’s normal sales process. As revenue grows we can hire more people with the same qualifications that are on our staff now.
Now, would you approve the budget presentation? How well does the revenue generation process have to be understood to get an approval?
You are forced to finance growth from existing revenue. Where do you look?
Some of the money you spend on sales and marketing generates a high amount of revenue. Other amounts you spend are bound to be less productive. Find the less productive ones and increase those that generate more. How?
Well, your channels of distribution, your marketing methods and the retail price of your product all affect the answer. The right steps to take when selling Tootsie Rolls are not the same for selling Oracle's database software.
Following are some general guidelines and clues.
Word of Mouth: What is the most efficient way that revenue is generated? Referrals. Word of Mouth. A product or service becomes popular.
What can you do to increase word of
mouth? Communicate with customers directly. Get stories published about the
impact your product has on customers. Create incentives to refer new
customers. Even if it is barely break-even, send promotions to your existing
customers. They will remember you and tell others. Create a new version of
your product (or service) that is only
More Efficient: Consider every cost, not just those officially labeled as Sales or as Marketing. For each one ask yourself, "Does this help generate revenue?" If the answer is yes, then "for each dollar here, how many dollars in revenue does it generate?" [If you do not know the ratio, then see Find the Ratio below.]
An example, your sales people generate their own prospects and do most of their selling face-to-face. Consider generating and qualifying leads for them: through direct mail, through outbound telemarketing, through advertising with a free premium given away.
– See, Major Account Leads and Appointments –
Another example, you advertise on TV and you have point-of-purchase displays in stores for a $ .79 consumer product. You use coupons. Your packaging is very effective. Retailers and wholesalers use the coop advertising program.
Portions of the Revenue Formula
Develop a spreadsheet model. Break up the sales and marketing costs into as many categories as makes sense. At least make sure that every separate category of revenue stimulus is treated separately.
When we say "category" we mean that point-of-purchase display stimulates revenue differently than coupons. Coupons are different from packaging. Face-to-face selling is different from outbound telephone cold calling and from running classified ads.
Eventually, you will want measurements everywhere as part of day-to-day process. Then you can review the many and interweaving influences in the revenue generation systems and processes.
Revenue formula, the Simple Ratio
Work with the simple ratio as a starting point.
The numerator is all costs of sales and marketing including management, occupancy for related employees and anything that is able to be directly allocated. [Do not include finance or administration nor should you allocate division or corporate overhead. Doing so is appropriate for a budget. But here it will just confuse and not help.] The denominator is total revenue.
A common answer for the simple ratio ranges from 15% to 40%, but not of revenue. Instead it is of gross margin.
Gross margin is revenue minus cost of goods or cost of services. The ratio to revenue can be in a much wider range because some wholesalers work with a 5% gross margin and some manufacturers have a gross margin of over 90%. Using the ratio to revenue can confuse cause effect measurements in part because of potential changes in the price mix and margin mix.
Do not use a small number of observations to make estimates. Expect to see transactions that do not fit expected ratios or patterns. Please, do not let it stop your search for meaningful ratios.
Many transactions come from customers who just buy more without any stimulus from your company. Other transactions result after three or four separate categories of stimulus: like a billboard, a radio ad, a talk with a friend and the display in the store.
You can sort out eventually all of the meaningful influences that affect purchase. With a full Revenue Accelerator system of processes and methods in place your growth can become self-feeding, automatically correcting and evolving.
However, you may not need to know the full detail, like how many end customers talked with another customer, with a sales person and with customer service after seeing three ads over the course of five months.
Look at the simple total costs for each category, the budget sub-totals for each major subset of the sales and marketing budget. Divide that by total revenue and by the revenue that you are sure would not exist if you cut that particular category, like press relations, or trade shows or a particular advertising campaign or geographic sales branch to zero. Make reasonable guesses. Use ranges. You will have to make guesses for some of this work.
In this document
Assume a hypothetical company that targets large, $100,000 transactions.
Advertising is 12%, marketing staff trade shows etc are another 4% and the sales dept costs 15% a total of 31%. How does that compare to others in directly comparable businesses?
If advertising was cut to zero, sales people and other categories would still generate half of existing revenue. If you eliminated the sales force and just have clerks take orders at headquarters, what would happen?
How much of your revenue really comes from “overall reputation and market awareness” and how much from fundamental, capable sales work getting people to listen, to show Active Interest?
Explore the ways to increase revenue and to clarify the Revenue Formula.
You can increase revenue without outside capital or additional budgets. Share ideas. What might work for your company?
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