The Revenue Growth Model
A Predictable Revenue Model (PRM) enables a company to achieve 20% or more revenue growth year over year, sustainably and profitably.
Its key benefits are:
- Sustainable high growth of over 20% per year
- At least a 30% increase in profitability
- At least a 30% increase in customer satisfaction
A Predictable Revenue Model is characterized by five traits that are necessary for delivering the above results:
- Specific and purposeful focus – when focus and specificity are lacking, people tend to do what comes naturally to them. The end result is that you have people rowing in many different directions and when it feels right to them. As a result, the boat tends not to move much. When specificity and purpose are added, people know in what direction they must row, and at what speed.
- A detailed yet simple Execution Plan – It is one thing to say we will grow at 20% a year. It is another thing to work that backwards so that people know what they have to do this week and next to get there. The execution plan is what ties the day-to-day efforts of everyone with the strategic focus so everyone rows in the same direction and at the specified speed.
- Systems and processes that are optimized to support the plan – rowing in the same direction and speed implies tools and processes that track and enforce these. Giving people different sizes and shapes of rows will make it harder to row at the same speed and direction. Making the rows the same size and shape, adding a navigation system, having a boat that is streamlined, all these aid in getting to the destination faster and with more certainty. Tools and processes that enforce the plan are a crucial element of a high growth plan.
- The right skills and reward system that execute the plan – it now becomes obvious that getting the right people and providing them with the right incentives increases the chance of rowing in the same direction, at the specified speed. You want people that have the natural inclination to do the things you want done and like to be recognized and rewarded for achieving the goals you set for them. You need smart, results-oriented people who don’t mind giving more each year, to get more than ever before.
- The constant gathering and analysis of data in order to drive continuous improvement—without continually analyzing data, the only way you can grow 20% or more is if your industry grows faster than that. How many times does that happen? If you gather data and analyze it regularly, you can make continuous improvements that add up to higher productivity than your competitors. Therefore, even if you industry doesn’t grow at a high rate, your company will as it does more business relative to your competitors.
We will discuss each one of these critical components in more detail, and more importantly, how to implement them in the most practical and least resource consuming way possible.
1. Defining a Specific and Purposeful Focus
Of all the five components of a High Growth Plan, this is by far the most important and most difficult to complete. It turns out that the difficulty company Executives face is not intellectual but rather emotional. Many postpone deciding on which markets to focus on for fear of missing out on revenue potential.
Ironically, the fact that there is no focus actually slows down revenue growth rather than increasing it.
Here is a simple test you can perform to find out how true this statement is.
Who do you think makes more money, the heart or brain specialist, or the general practitioner doctor?
In the era of the PC, Microsoft was the largest software company in revenues. More importantly, it took more than 50% of all of the profits of the entire PC industry! Why, because 90% of the PC’s ran on Microsoft Windows, and nearly all of these used Microsoft Office.
Google owns 80% of the search market, which enables it to grow roughly 20% a year, generate over $700,000 in sales per employee—an incredibly high productivity rate.
Apple sells only a handful of products (laptops, desktops, tablets, and phones primarily)—yet it is either the number 1 or #2 company in the world in market capitalization, with over $100 billion in cash in the bank.
These few examples show that focus increases revenue, not shrink it. But even more critically, it has a remarkable effect on profits. Focused companies, which sell a few products to a few markets, tend to have a lower cost of doing business, higher name recognition and market share, faster sales cycles, and overall better customer satisfaction than those that sell many products in many markets.
Which company has better customer satisfaction—AT&T or Apple Computers? Which of the two do you think sells a wider selection of products to more diversified markets?
As Geoffrey Moore, the noted high-tech marketing guru and best-selling author eloquently puts it, “…you do not have to pick the optimal beachhead to be successful. You just have to win the beachhead you picked”. In other words, it is far more important to commit to the decision you made (once you pick a target segment) than it is to make the best decision in picking the right segment.
2. Building Detailed but Simple Execution Plan
Once a market segment is picked, a specific plan for dominating this market segment can be prepared. By dominating, we mean a market share of at least 35-40% of that market segment within a three-year period. That is the goal of the plan.
The next phase is to define how you will achieve the plan. Your plan has to take into account three separate but highly inter-related sets of activities to achieve the desired goal: Marketing, Sales, and Delivery.
At SOMAmetrics we advocate the use of a Four Funnel Framework to integrate Marketing and Sales to achieve the desired Revenues. To give a simple illustration, say you want to achieve $10 million in incremental revenues in 2015 and your average deal size is $50,000. That means you need to close 400 new deals.
Say, your average closing ratio is about 25%. Therefore, you will need to have about 1,600 potential deals or Sales Qualified Leads (SQLs) in your pipeline. Let’s further say that maybe 20% of all of your Marketing Qualified Leads turn into a SQL. Therefore, you will need about 8,000 MQLs delivered by your marketing department in 2015. If your closing cycle is, say four months, then these 8,000 MQLs have to be delivered by the end of August to make a difference in 2015 revenue numbers.
The above numbers now give us the Planning targets:
- $10 million in new revenues
- Four hundred new deals closed
- One thousand six hundred opportunities (SQLs) in the sales pipeline
- Eight thousand Marketing Qualified Leads from Marketing
- Roughly 1.6 million marketing touches to generate the desired 8,000 MQLs
The next step is to figure out how each of these numbers will be achieved in terms of resources and support systems.
- How many sales reps will be needed to close 400 deals in one year?
- Where will you get the list of prospects and how big must the list size be?
- What are the marketing assets you must develop to attract these prospects, and who will be developing these assets? How much time will that take?
- What kind of marketing campaigns must you conduct to generate 1.6 million touches to your targeted prospects? How often must you conduct these campaigns, and how many times per prospect?
- If you have to install your products, and train customers on how to use them, you have to timeline the closing of deals and see how many resources you will need to implement what your sales organization has sold.
- You also have to worry about supporting customers on an ongoing basis. Your plan is to add 400 more new customers this year. How will they be supported? What is the average customer satisfaction rate you are going for? What will that entail to satisfy your customer satisfaction metric?
This is the minimum level of detail required to implement the plan.
Our experience has shown that the degree to which a plan is executed is a function of two critical factors: the level of detail of the plan, and the simplicity of the plan. These two factors, while NOT exactly being mutually exclusive, are hard to work into the same plan and strike the right balance.
3. Implementing Systems and Processes that support your Plan
The best way to manage the work of people is to create the necessary automated processes that guide their work. If we want to make sure that our people are rowing in the same direction and within the same rhythm, we need to equip them with oars that are the same size and shape.
The organizational parallel to this is to standardize the systems and processes that your people use and to encourage them to use these in a consistent way. This introduces an age-old debate about what is the right choice to make, select a system that can do pretty much everything such as SAP or Oracle, or go with a best of breed approach and integrate the systems.
Our view is always to go with the best of breed approach provided you also follow some basic rules:
- Use the same rigor to select the system of choice, regardless of whether you are going with a best of breed or a monolithic system.
- The total number of systems you use within your company should be the fewest possible and yet allow you to automate all of your major business processes.
- Each of your systems should be well integrated with any system that already has the data this system needs to use. In other words, a cardinal rule is that data should always be entered once and used as many times and places as necessary. One crucial design decision is which system should be responsible for capturing the data in the first place, and which systems are to consume this data from that system.
- In designing your systems and processes, it is wise to follow a key principle: design for version three, spec out version two, and build version one. That way, you will reap benefits right away while building critical flexibility into your system.
- Take a full audit of your systems and processes at least every 12 months to verify that they are still relevant, that you have not outgrown them, and that you don’t have critical gaps in your system and processes that might prevent you from achieving your growth targets.
In our experience, we have found Salesforce.com to be a powerful, flexible, and extensible platform that can handle the requirements of pretty much all small and medium sized businesses today as well as grow with them to meet their needs of tomorrow. Because of the huge amount of applications developed to integrate and extend the core capabilities of Salesforce.com, it is the most affordable platform for running business processes for most small to medium sized businesses.
4. Getting the Right Skills and Reward Systems in Place
The next step is to think about human resources—what kind, how many, and how you compensate them. Right after the first component—deciding on which market segment to focus—this poses the greatest difficulty for most of our clients, especially those that have been in business for ten or more years. This is especially true for those that founded their companies with little or no funds, who hired help they could afford—that is to say cheaply.
In very few instances, these founders lucked out and hired moderately skilled but highly motivated people for cheap. And these extraordinary individuals put in their heart and guts to grow the company along with the founders. Ten years later, they had acquired vast knowledge and experience and are indispensable to the company.
However, the more likely scenario we have seen is that the founders hired moderately skilled and motivated people for moderate pay. Then they used the Peter Principle; promoting people to a new level based on their ability to do their current job, rather than the new one, rewards seniority by putting in place of high power and responsibility those that do not necessarily have the ability to discharge that responsibility effectively. Furthermore, these managers feel more comfortable with this level of experience and prefer to hire people they feel are less capable than them, rather than more capable.
Sooner or later, the company faces the danger of accumulating moderately capable people who give moderate performance. Newer competitors come out with better products and services, the response to which is to compete on lower price, which further deteriorates the company’s position.
It is critical to hire smart, results and growth oriented people and do everything in your power to keep them: by rewarding them well, giving them challenging assignments, and recognizing them in front of their peers when they successfully carry out their assigned tasks. It is not just money, but also growth and recognition, along with money, that is the effective reward system for smart, results and growth oriented people. They will work hard, typically 50 or 60 hours each week, to earn their reward and their recognition, and to master new skills. And in the process, will help propel your company into its next stage of its growth.
5. Constantly Analyzing Data for Continuous Improvements
Whatever is not measured does not get attention, and it will never improve. That is well known and accepted. The key to growth and improvement is to bring attention to the very few things that matter—what we call Key Performance Indicators or KPIs.
Each of the three sets of activities we mentioned—Marketing, Sales, and Customer Support—has its own set of KPI’s.
The steps are simple, but they require a high degree of rigor and diligence to actually convert into real results:
- Define the KPIs (some we have mentioned above already such as number of SQLs, MQLs and touches; percentage of accepted SQL’s by sales; average sales cycle; average deal size; number of sales contacts to close a deal; revenues by employee; revenue by sales rep; sales cost as a percentage of revenue; marketing cost as a percentage of revenue; time from contract to invoice; account growth rate per year; customer satisfaction rate; and so on.
- Design the monitoring process/systems—what is your system of record that can handle your processes and with reasonable ease provide the data you need?
- Automate the reporting and management and review of these KPI’s so they are in everyone’s face as frequently as possible?
- Set quarterly objectives on moving them a notch to the next level so they are continually improved. Can you get your managers to review data each week and set the next week’s tasks towards achieving these targets?
- Work back into the plan the specific changes in systems, processes, and work activities that must happen to obtain those continual improvements.
In this article, we discussed how a company that desires to meet its growth objectives on a sustained basis must do five things well, and must do them continually and relentlessly. It must decide to focus on a single or no more than two markets so it can act with purpose; it must develop a detailed yet simple plan; it must build the right systems and processes needed to execute the plan; it must hire smart, results and growth oriented people and reward them the right way; and it must constantly collect and analyze data so it can continuously improve towards sustained future growth.
All five are critical and must be done in the correct order. We also saw that #1 and #4 are probably the hardest to do of the five, and probably because they both require breaking away from the old culture and moving to the one.
However the real cost of not making these changes is falling into mediocrity and possibly risking the company to fail. This is why a company must target a growth rate of about 20% or more each year so it is assured continued viability and relevance in today’s and tomorrow’s market place.