The chief revenue officer role was created to ensure that marketing, sales, and customer success are working together to create a seamless customer experience, focused on the right market segments that will ensure healthy revenue.
Of course, every sales leader wants to focus their sales capacity on the right segments of the market. But how do you identify which tactics will make the most impact, to ensure revenue is healthy?
In the video below, we dive into how I define healthy revenue, even in times of uncertainty.
There are three key factors to think about to ensure your revenue is healthy.
Committed Revenue
Committed revenue is revenue under contract. If you have a contractual relationship with someone, that's worth more than a one-time big ticket deal that may or may not happen. Depending on the controls you have around pricing, long-term commitment is worth more than short-term commitment. As an example, take Amazon Prime — which is committed revenue, an example of an ongoing income stream. The quantity and type of products an Amazon customer may purchase fluctuate and are influenced by many external factors (take the current global pandemic as an example). But the revenue from Prime memberships remains constant and high-margin. That’s why an annual Prime subscription is so much more valuable than the uncertain and uncommitted amount a customer may spend on products each day.
Recurring Revenue
I'd much rather have a customer that continues to buy over and over again than one who buys just once. For technology, Software as a Service (SAAS), and cloud businesses, creating a recurring revenue stream has great potential for a compounding effect. With that SAAS subscription, you've created a revenue stream.
Real estate is a good analogy. There are people who buy houses and flip them and there are people who create rental investment properties. Rental and lease agreements create an annuity that continues to pay you over and over again over time. Whereas when you flip the property, you make a certain amount, and then that transaction is done.
Recurring revenue matters, which means selling doesn’t stop with the signed contract. You have to ensure your customers are seeing value every step of the way.
High-Margin Revenue
It's much more interesting to have a high-margin business than a low-margin business. That might sound simple, but the reality is that sometimes people chase top-line dollars thinking that they can't wait to have a certain number to shout from the proverbial rooftops, say one billion dollars in annual revenue. But if your expenses are $1.1 billion, you've just lost money. And you can only keep that going for so long.
When you have a higher margin you have flexibility and options as a business. You can use that margin to invest in your sales team to capture greater market share, to invest in new products and services that help you attract new customers, or to provide greater support resources. If you have a high margin plus committed revenue, you have a lot of leeway before you have to make difficult decisions when times get tough.
By contrast, think about what a business with low margins faces when economic headwinds hit. When you're in a very low-margin business, you have a limited set of options because every little move makes a difference to your bottom line. When conditions are tough, you have to make quick decisions in order to ease the pain. And we all know that quick decisions aren’t always the right ones.
When you focus your sales capacity on these three elements, you’re much more likely to achieve healthy revenue, and thus predictability even in uncertain times. This predictability and business health can lead to better business decisions, long term value, and more market share.
Once these three elements are established, it’s important to decide the ideal customer profile.
How to Identify Your Ideal Customer
The ideal customer profile is not necessarily defined by where you're currently winning. The specific industry or segment you’re winning in now may not be the area where you will continue to grow, or where the highest potential lies.
For example, if the majority of business you are currently winning is in the traditional healthcare market, but your customer acquisition cost to do so is exorbitant and margins are slim, you may need to rethink where you focus your sales capacity. On the flip side, if you've just closed a few deals in telemedicine with short sales cycles and high average contract values, you might be onto something.
To identify your ideal customer, I like to use a simple two-by-two framework that graphs opportunity size on one axis and the ability to win on the other axis. The ideal customer sits in the upper right quadrant.
Start by determining the opportunity size or total addressable market (TAM) for each potential customer category. For our business, as is the case for many organizations, the potential list of options is long. Categorize them by industry, use case, company size, geography, or some other differentiating factor in how they use your product/services and/or how you engage with them.
Plotting the TAM on a vertical axis, then add a horizontal axis representing your ability to win, or the likelihood you can be successful with this category of customer. Your graph will now be divided into four quadrants, with the most important one in the upper right: high potential and a high likelihood of winning.
While the idea behind this graph is really simple, the horizontal axis is actually really critical because there's a lot that factors into it. If we return to the example of healthcare, that industry has regulatory requirements that make it a more cost-prohibitive target than industries with lower bars to entry.
At Rev, we build competitive motes in key categories by investing in products and technology that make it more difficult for our competitors to enter various markets. This increases our probability of winning in a category if we go after it. As you place your potential customer categories along the “ability to win” axis, it helps to have a good understanding of your position in the market for that customer group.
Once you map out your potential customer categories into the four quadrants you’ve created on your graph, that's your starting point. From there you can repeat the exercise, drilling down into subcategories or use cases.
Identify Unique Differences Among Your Customers
A good way to determine whether you want to segment your customers by industry, vertical use case, geography, or some other segmentation is to identify the unique differences among various customer types.
For example, when I worked at LinkedIn we looked at many ways of selling to our customers, all of whom needed to hire great talent. Whether you're recruiting for a software developer for Ford, Google, or Discover, the skills were fundamentally the same.
But a large multinational company's need to build teams that could push releases every two weeks was actually pretty different from those of an SMB that needed to hire three people per year. So we found that the size and complexity of an organization mattered more in terms of shaping needs for our product than industry did. That was the unique difference among our buyers and it helped us decide to segment our customers by organization size and complexity rather than by industry.
At Rev, we focus on the unique difference around specific use cases and industries, not size. We also look at commonalities. For instance, for movies and TV, captioning quality really impacts whether a buyer receives a message in a way that makes that content effective and does not distract from the visual imagery. That's a very different use case than the person who needs their board meeting transcripts to be accurate for key stakeholders but visual appeal is less of an issue.
Once you segment, you can examine whether your materials and internal resources need to change to appeal to different customers. Alternatively, finding commonalities between customers will allow you to create repeatable selling motions and reduce the need to create one-off collateral or training for each unique use case, which is ultimately the key to scaling.
A Useful Way to Think About Exits
Putting a clear framework around the way that you think about selling helps you build a more predictable business—one that’s set up for long-term success. That matters not only to your employees, but also to other key stakeholders including investors and partners.
In growing companies, there’s the temptation to think about an IPO or acquisition, but it’s important to remember that the exit is not the goal. Instead, a public offering, the next round of financing, a merger or acquisition is just strategic tactics to accomplish your company’s vision and mission. It’s a way of bringing more capital and attention to what you do. If you allow the exit to become the goal, then the people that eventually buy your company—shareholders, if we’re talking about an IPO—buy at the end of the value cycle. And every investor wants to buy at the beginning when they have the opportunity to benefit from growth.
A good analogy might be a wedding. If you believe that the wedding is the finish line, that marriage will likely erode over time. If you believe the wedding is just the starting line, you’ll focus on the importance of a loving and healthy long term relationship.
That’s good advice in life, and in business.
ABOUT THE FORECAST
This story is part of Clari's series, The Forecast, where industry leaders share their insights. Watch all of the videos and check out their blogs: