Revenue is the engine of any business — without it, you’re not going to get very far.
Revenue not only determines how, when, and where your business can operate, but also how it can grow into the future. While every company is different, a company’s revenue typically goes through a relatively common series of stages.
In this breakdown, we’ll touch on a few of the many elements of what revenue growth is, why it’s important, and how it determines the success of an early-stage company.
Defining Your Revenue Model
Defining your revenue model is an important exercise for any early-stage company. While it may seem rudimentary, it is vital to have a comprehensive and shared understanding of what your company’s revenue model is and where it wants to ultimately go in the future.
Getting Your Metrics Together
You can’t expect sustainable revenue growth if you don’t have a system to track your sales metrics.
Sales metrics are data that track the performance of salespeople, sales teams, and the company as a whole. These metrics are important in establishing company goals, setting compensation, setting strategies, and planning for growth.
This isn’t a comprehensive list, but it’ll help point entrepreneurs in the right direction
Metrics: Key Performance Indicators
There are a variety of data types that entrepreneurs should track, including key sales performance indicators.
These include a company’s total revenue, revenue by product, percentage of revenue from existing customers, percentage of revenue from new customers, year-over-year and month-over-month growth, average lifetime value of a customer, deals lost, geographical sales, other geographical important metrics.
Metrics: Activity Sales Metrics
Develop a better sense of your sales team’s effectiveness with activity metrics.
Ensure your sales team collects such data as calls made, emails sent to prospective clients, meetings with prospective customers, proposals sent, social media interactions, and other activities that can reflect sales activity and effectiveness.
Metrics: Pipeline and Lead Generation Metrics
It’s vital to track pipeline sales metrics and lead generation figures. Establish a system to track the average length of a sales cycle, average contract value, as well as total open opportunities by month by a team and individual, and total closed opportunities by month by a team and individual.
With lead generation metrics, collect data on the average lead response time, percentage of leads followed up with, percentage of leads dropped, as well as the frequency and volume of new opportunities added to the sales pipeline.
What are key revenue drivers?
Understanding key revenue drivers will better enable sustainable revenue growth. Key revenue drivers refer to the most important generators of revenue for a company.
Examples of revenue drivers are its sales team, website traffic, the number and price of products sold, the units of production, and many others. Your revenue strategy must be informed by your key revenue drivers and how they operate.
Identifying Your Key Revenue Drivers
To identify what your company’s key revenue drivers are, consider what variables affect your sales figures, cash flow, and operational costs.
For example, a shoe retailer’s key revenue drivers would be the number of products sold, its shoe prices, store locations, and salespeople.
Once you’ve determined what drives your bottom line, take the list of revenue drivers, and determine which are the most important to focus on and improve. Your key revenue drivers will have the largest overall impact on your business and its success.
Tracking Key Revenue Drivers
Maintaining a system to track metrics on your key revenue drivers is an important aspect of strategic planning.
Using our previous example with a shoe retailer, the company’s founder should track metrics such as the number of products sold, its shoe prices, store locations, sales, and revenue. Such metrics will enable the entrepreneur to monitor a store’s performance, understand what factors contribute to its success, and identify where to invest company resources.
Understanding How Revenue Fits into the Stages of a Startup
Revenue ultimately determines what stage your company is in, and thus, how large your team is, its market, what funding it can attract, and more.
For the purposes of this guide, we’ll break down how revenue fits into three stages of an early-stage company’s life. We’ll use a fictional company example called SmartShu.
Stages of a Startup: Validation
In the first phase, SmartShu is validating its product and perfecting its product-market-fit.
SmartShu has just landed its first few paying customers, has a small team, and is bringing in less than $1 million in revenue. SmartShu isn’t seriously considering raising outside capital, but rather focusing on validating its product with a market, learning about its customers, and identifying other opportunities to grow.
Stages of a Startup: Revenue Growth
In the second phase, SmartShu is maximizing its revenue growth and attracting customers far and wide. SmartShu has crafted a predictable and successful sales process that’s raking in $8 million per year and has grown its team to a few dozen people, including a talented leadership team. SmartShu also has or is likely to have raised outside capital, such as taking on equity investment and/ or other growth capital.
Stages of a Startup: Scale
SmartShu has now grown considerably from its early days. The company has a highly sophisticated operation that generates $100 million in sales and is looking to scale its business around the world. SmartShu’s 750 employees are scattered at offices across the world and its highly -experienced executive leadership is looking to further accelerate revenue growth with additional investors.
What is a revenue strategy?
An effective revenue strategy establishes short- and long-term strategies that predictably boost sales.
To start your company’s strategy, consider a few questions:
- What’s your sales process, and what are its strengths and weaknesses?
- How effective is your sales team and are folks in the right roles?
- What structure or funding is necessary to implement this revenue strategy?
- What growth opportunities are available to your company?
What is your revenue model?
A revenue model is a basic framework of how a company makes money. In general, a revenue model charts what value(s) a company offers customers, how it is priced, and how it’s paid for. Common revenue models are subscriptions, licensing, payment per user, affiliate revenue, commission, and others.
