Not All Revenues Are Created Equal
by Doc Rich
A sale is a sale is a sale. Right?
Wrong!
Although sales revenue is the lifeblood of a company, some revenues are better than others. Revenue can, and should, be viewed in terms of quality. For example, revenue that is sustainable and stable is generally of higher quality than revenue that is difficult to maintain and volatile.
Most companies stress the importance of revenue growth through the acquisition of new clients or expansion into new markets. These avenues of growth are fine as long as they do not overly detract from the attention and resources given to properly maintaining current accounts and customers. The long-term viability and profitability of a firm is dependent on maintaining a solid base of customers who purchase your goods or utilize your services year after year.
Acquiring new clients is expensive. Indeed, first year commissions, travel cost, conference and expo fees, discounts and other acquisition expenses can easily outpace the additional revenues created. In fact, most companies find that the net return (incremental revenue minus additional costs) to adding new clients is usually negative in the first year. Thus, unless these clients become repeat purchasers in years two, three and beyond, long run profitability actually decreases.
Unfortunately, a common management response to declining profit is to invest even more money and attention into new client acquisition. Often times this response requires a reduction in the resources allocated to current clients. A negative cycle develops and the financial consequences of growth through overemphasis on new client acquisition can be devastating.
Obviously, new clients and markets are important. The issue for most companies is to properly balance the attention given to finding new clients to the attention given to maintaining and improving the existing customer base. The first step to find and sustain this proper balance is to define revenue quality.
Note that the definition of quality revenue will differ from company to company. A company that delivers a high quality product and/or focuses on customer service will have a different definition of revenue quality than a company that stresses low cost and high volume. Evaluating revenue requires a company to develop a specific definition of desired revenue sources that is consistent with the company’s overall mission statement. Whether startup or seasoned, a company must have a strategic long-term vision for revenue.
Does your company need a revenue quality checkup?