Let me guess. Your company is not going to meet its revenue objectives. Surely, there is something wrong with your sales or marketing, or both.
So goes the thinking of many leaders when they face disappointing results. And yet, the first rule to solve a problem is to make sure you’re actually solving the right problem.
Let’s step back for a minute to ponder the question: What is revenue?
The revenue formula helps you reframe the problem
The answer is not as obvious as you may think.
For a start-up, the revenue formula is:
Revenue = new qualified leads x sales conversion rate x price x frequency
But if you already have an established customer base, your revenue formula becomes:
Revenue = (new + existing customers) x price x frequency
Notice the difference.
Start-ups don’t have much of a choice. They may not have the necessary credibility to offer higher prices and the impact of frequency will be marginal at first-even if your 10 customers buy three times a year, you still “only” have 10 customers. As a result, start-ups need to attract heaps of new leads and maximize their sales conversion rate to get new customers.
But established businesses have a lot more leeway. They could retain more existing customers, raise their prices or increase the frequency of transactions through effective up-sell and cross-sell strategies.
In other words, to increase revenue, you need to consider your circumstances and make sure you don’t define the problem too narrowly.
Step away from the eternal “We need more leads!!!” It doesn’t mean anything.A lead is nothing until it converts to revenue. Click To Tweet
Make sure you look at each part of the revenue equation.
Focus on what matters
Now the question becomes: Which part of the revenue equation should you optimize?
The short answer is: The part that will give you the most impactful results.
Problems are generally multi-causal, but what you want to do is “Pareto” the revenue formula, so that 80% of your results come from 20% of your efforts. In other words, you’re looking for small adjustments that can make a big difference.
And since chances are you don’t have access to unlimited resources, you may want to start in the following order:
- Maximize customer retention
- Raise your prices
- Optimize up-selling and cross-selling to existing customers (frequency)
- Maximize your sales conversion ratio
- Generate more leads
Notice that “Generate more leads” is not the first item on the list. This is because the cost of maximizing customer retention is generally lower than the cost of generating more leads. Increasing customer retention is therefore a very efficient strategy to boost revenue.
The beauty of looking at the revenue problem this way is that it helps you reframe the question. That way, you’ll be able to determine whether you need to make adjustments outside of sales and marketing, and more importantly whether these adjustments may have a bigger impact on revenue.
Play to your strengths
Once you’re clear on what should be done, you have to figure out how you’re going to allocate your resources.
As you do, remember that you must play to your strengths. Don’t try to mimic your competitors’ strategies. This is really the essence of strategy: it should always be unique to your strengths and provide you with a distinct advantage.
There are only so many hours in the day and whether you like it or not, every time you say “yes” to something, you’re actually saying “no” to something else. Wouldn’t you prefer to make this choice consciously?
Be as ruthless about what you should start doing as what you should STOP doing. Don’t give up too quickly either. Sometimes strategies take time to deliver. If at any point you doubt that you’ve made the right decision, remember that it is crucial to differentiate between tactics and strategies.
Regardless of the strategy you’ve decided to adopt, you’ll find dozens of tactics to support it. Some will work and some will fail. But as Seth Godin reminds us, just because your tactic didn’t work, it doesn’t mean you have to change the entire strategy. That’s why, at first, progress is often more important than performance.
Using performance metrics to track progress
Every company has different ways of measuring progress.
Whenever possible, try to obtain industry benchmarks. For instance, Unbounce regularly publishes a Conversion Benchmark Report that shows the type of landing page conversion rate you can expect by industry. If you have a 2% conversion rate, but the report indicates the average in your industry is 5%, you have room to grow.
This type of information is extremely useful if you’re running a SaaS model, because an optimized conversion rate can double your revenue.
If you’re dealing with a more traditional B2B complex sales environment, however, you may want to follow other sales and marketing key performance indicators such as:
- Lead-to-purchase conversion rate
- Contact-to-purchase conversion rate
- Revenue per sale from marketing generated leads
- Percentage of leads accepted by sales
- Marketing lead pipeline (or opportunity) value
- Direct sales time
This is just an example of the types of metrics you could track, especially if you’re using a CRM or marketing automation system. Don’t overcomplicate things. The goal is just to determine if you’re on the right track of if you need to change course.
As tempting as it is to blame sales or marketing for disappointing results, you have a better shot at success if you take a step back and start asking the right questions. Your team will thank you for it.