All Dollars Are Not Equal: The Crucial Difference between Good, Neutral & Bad Revenue
March 29, 2016
Strategy is about making choices, including what type of revenue to pursue – and what type not to accept.
Thus, all (revenue) dollars are not equal – some revenue is very good for your company, while other types of revenue can do serious harm to the value of your business.
To get a sense of where your company stands, take the Good-Neutral-Bad Revenue test below.
Developing clear rules of engagement to test revenue opportunities for their potential impact is fairly straightforward, but managers still need to have the intestinal fortitude not to give in to the temptation to chase the wrong opportunities, especially when the pipeline is a bit lean.
The opening paragraph in a recent newspaper article on investment bank Credit Suisse’s financial travails resulting from buying into risky trading positions reminded me of a widespread problem in the tech industry. The theme was the damage that an unbridled and undiscerning pursuit of revenue can do to an organization, let alone its customers and investors. Here’s a quote:
“A thirst for revenue ‘at all costs’ drove traders at Credit Suisse to take large, risky positions, catching top executives off guard and forcing them to accelerate cost-cutting over the next three years”, according to the bank’s new chief executive, Tidjane Tiam, as reported by Chad Bray and Liz Moyer in the New York Times (March 24, 2016).
This particular problem is leading the bank to shrink its organization, particularly reducing its “outsized” positions in risky and hard-to-sell securities such as the notorious collateralized debt obligations (CDOs) and other distressed credits. If you’ve read or seen the recent movie “The Big Short”, Michael Lewis’s bestselling story of the 2008 meltdown in subprime mortgage bonds, you’re probably extra-sensitized to the catastrophic consequences of uncontrolled trading behavior on Wall Street over the past decade or so.
Interestingly, what happens every day in tech is not that much different than what we’ve seen happening in the much-derided financial sector, even if it is not quite so cavalier or out of control. CEOs and CFOs of large and small tech companies coyly admit to doing whatever it takes to close the quarter one penny above guidance or investors’ expectations. Internally, they sanction and even encourage bad behavior by their sales teams, where discounts up to 80% or more on list price are commonly used in order to drag a deal across the line. As long as the company makes its revenue numbers, why should there be a problem?
The Good-Neutral-Bad Revenue Test
The problem is that while good revenue benefits the company in more ways than one, and neutral revenue provides some benefit to the company, bad revenue can really hurt the organization and its reputation with customers. If executives really believe in the cause their company is in business to fight for, and assuming that they care about being as relevant and profitable as possible, I’d urge them to keep in mind the following simple maxim, and regularly remind their marketing and sales teams of its importance: “All (revenue) dollars are not equal”.
Here is a Good-Neutral-Bad Revenue test which can help you to determine how your company ranks, and where your weak/strong points are regarding your ability to filter different revenue-generating opportunities. The definitions of each revenue category are below, and below them is the scoring system.
Good revenue = Revenue earned from your target customers by helping them to solve problems that they care about, and doing so differently and better than any of your competitors could do. Assuming that your business model is sound, Good revenue should be (highly) profitable because your products and services have a close-to-exact fit with what your customers need from you (and/or your partners in crime). Over time, serving a critical number of target customers with an offer that actually helps them to solve their problems creates pull for your offer, due to the intense peer-referencing that many of them will do – thus providing an organic “marketing” effect that creates new sales opportunities for your company.
If most of your revenue and profits qualify in this category, score 50
If a meaningful percentage of your revenue and profits (say, 20%-30%) qualifies in this category, score 25
If very little or none of your revenue and profits qualify in this category, score 0
Neutral revenue = Revenue that helps you to make your quarterly or annual plan.
This revenue may come opportunistically from outside your target sweet spot, but these customers have needs that are close enough to be reasonably well served by the offer(s) that you have tailored specifically for your main target customers. Since the customers who generate neutral revenue for you belong to a variety of different market segments, it may not be very profitable to serve them; more importantly, you are not likely to generate much referential pull from the limited market share that you achieve, so winning their business may well be neutral to your power or valuation.
If most or all of your revenue qualifies in this category, score 10
If a meaningful percentage of your revenue (say, 20%-30%) but not more than 50% qualifies in this category, score 25
If very little or none of your revenue qualifies in this category, score 0
Bad revenue = Revenue that soon induces “seller’s remorse”; in other words, the excitement of going after the opportunity and closing the deal – whether a small opportunity that just doesn’t fit what you do or one of those big whale opportunities that management likes to label “strategic” – becomes rapidly outweighed by your inability to fulfill the customer’s expectations. Often the larger opportunities become a massive drain on your resources because of their demanding “custom” requirements, compromising your ability to serve your other customers (and types of revenue) effectively.
If most of your revenue qualifies in this category, score -100
If a meaningful percentage of your revenue (say, 20%-30% or more) qualifies in this category, score -50
If very little or none of your revenue qualifies in this category, score 25
Add up your scores and see how your company comes out according to the following metrics:
Score of 60 or higher – your company is probably a leader, or will soon be one, because you are already differentiating between Good, Neutral, and Bad.
Score of 0-60 – you’re in the middle of the pack, most likely your strategy and opportunity selection need work though it might be working in parts.
Score of below 0 – time for a search and rescue operation, or a strategic reset.
Just so that I don’t fall prey to sounding too theoretical, there are simple, practical rules for avoiding the risks inherent in chasing deals that you aren’t equipped to handle, one of which is to bring a partner in who can be the general contractor, leaving you to play a suitable support role and earn your fair share of revenue without sticking your neck out too far. This can turn a potential Bad revenue opportunity into a Neutral revenue outcome, and maybe eventually a Good revenue outcome if the opportunity is with a future target customer.
To return to the Credit Suisse example, leaders need to be crystal clear about the values they intend to live and not just preach. Mr. Thiam, the new CEO, may have inherited a cavalier business culture from the previous CEO, but he needs to rapidly imprint his more prudent values on the organization. Leaders need to have a good answer to the question “To whom are we primarily in service?” These days, the conventional response (“our shareholders”) no longer survives serious scrutiny for any business that intends to become sustainable, particularly in the subscription-and-renewals (i.e., cloud) game. As everyone knows, success today is much more about helping your customers use technology to produce results beneficial to their business, thus generating profitable revenues for your company, while also encouraging them to use more of the services you provide as long as doing so helps them to solve new problems. Indeed, most management teams today understand at least part of the customer success imperative. But, as smart and dedicated as most executives are, if all they’re doing in reality is using “customer success” as a mantra to pursue short-term sales success, the odds are that they are causing damaging unintended consequences that can be hard to live down.
If you are clear about who your target customers are – and also who aren’t your target customers – as well as what type of problems you are in business to help them solve, all you need to do is establish clear, common-sense rules of engagement regarding what type of revenue you will pursue, and what type you choose not to pursue. There should be no excuse for chasing revenue in a manner that results in financial losses, customer attrition, or other problems. By keeping the contrast between Good, Neutral, and Bad revenue vivid in your employees’ and partners’ minds, establishing simple protocols so that everyone in your organization understands what you mean by each, and making it a condition of continued employment (or partnership) to observe them, you can produce optimal results and avoid nightmare scenarios with customers whom you have no business trying to serve.