Description
Business Managers spend valuable time poring over revenue and profit figures. The process focuses much attention on the analysis of financial statements, budgets, business plans, etc. However, a critical and often overlooked aspect is the quality of revenue. Armed with a sound understanding of what inputs drive quality, Business Managers can make more informed decisions on where to invest and where to focus management attention.
Quality of Revenue Explained
The concept of revenue quality speaks to how sustainable and predictable the revenue (and thus profit) is likely to be in the future. While traditional financial analysis can provide a detailed picture of what the revenues have been and where they have come from, it does a poor job of providing information that can drive meaningful decision-making for the future. In other words, an analysis in the absence of any attention given to quality provides no answers to the “why” questions and is of no real predictive value.
Over Reliance on Acquisition of New Clients
Most businesses expend a great deal of expense and investment in acquiring new clients, often with little or no return in the first year. A VP, Sales usually has quite a lot of money and resources at his/her disposal to pay commissions, travel costs, conference fees, etc. in order to land new clients. Given the often negative return on investment in the first year, if clients do not become repeat buyers in years 2, 3 and beyond, the business will very quickly run into severe financial difficulties. Unsuccessful companies tend to face this issue by investing even greater amounts in new client acquisition in order to make up for the loss of existing clients, and this negative cycle goes on until the company finally meets the financial breaking point.
The root of the problem is the mistaken assumption that adequate attention is being paid to nurture and extend the existing client relationships, and thus management focuses most of its attention on the sexier business of new sales. With management’s attention cast elsewhere, clients are lost as more and more investment is poured into the acquisition of new clients rather than into improving the existing client base.
What are the Components of Quality?
The quality of revenue can be broken down into 2 distinct components, which taken together provide an excellent picture of just how sustainable and predictable the revenue is; client loyalty and the presence of an account management structure.
Client Loyalty
Frederick Reichheld is the preeminent academic expert in this field of study, and I use his definition of loyalty – “The willingness of someone to make an investment or personal sacrifice in order to strengthen a relationship.” This is superior to the more common metric of satisfaction for the purpose of measuring the quality of revenue, because it predicts future behavior. And this is borne out in a review of studies which demonstrate that loyalty is highly correlated with profitable growth across many industries. An excellent summary of this area is captured in the December 2003 edition of the Harvard Business Review in an article entitled “The One Number You Need to Grow”.
Presence of Account Management Structure
As described above, most organizations seem to have lots of cash available for activities related to acquisition of new clients (low margin), but many have very little resources dedicated to the maintenance and growth of existing clients (high margin). But the quality of revenue is inextricably tied to the presence and effectiveness of an account management structure. This is about nurturing the client base and weaving an indispensable relationship between vendor and client so that it acts more like a partnership.
Putting it Altogether
Clients who are loyal and who are serviced by an effective account management structure buy more and remain as clients longer. Other benefits are solicited and unsolicited references provided to other clients, price acceptance and less drain on operational resources. All of this adds up to an enhanced quality of revenue and thus a permanent increase in future revenues.
