Creating Resilience – Part IV
Revenue growth is another strategy of resilients. There are a number of such strategies for achieving growth in revenues that, in turn, contribute to the improvement in margins.
Focusing Effort on High-Margin Outputs
Focus on high-margin products and services. However, oftentimes volume increases achieve by loweringprices may actually sacrifice margins. Identifying and addressing unmet customer and market needs may result in increased volumes at premium-prices.
In addition to greater emphasis on high-margin products and services, improving the focus of the sales team through incentive systems that encourage greater attention on more mission-related activities. For example, an organization using AVM performed an analysis of the effort expended in their Sales organization and found the following distribution.
Based on this analysis, the following actions were taken on the basis of their discoveries:
- Supporting customers and end-users was the sole responsibility of the Customer Support team and represented non-mission-related effort on the part of Sales. Total responsibility for customer support was assigned to the Customer Support team, resulting in a 50% increase by the Sales organization on revenue generation.
- The focus within Sales was shifted to both higher revenue and margin service offerings.
- The Sales compensation plan was shifted from the number of deals sold to the revenues and margins achieved by those deals.
- Within six months, a 12.8% increase ($45M) in revenues was achieved (after revenues had remained flat over the previous 4-5 years) accompanied by a significant improvement in customer churn.
Another strategy for revenue growth is strategic pricing. Unfortunately, too many companies unknowing price their products and services at a loss. Often pricing is established in the absence of accurate cost information that together, will impact bottom-line performance — costing and pricing are tightly integrated and must be carefully computed to ensure profitable growth. There are typically three outcomes associated with the relationship of costing and pricing:
- Over-priced products and/or services, causing sales to be lost to more price competitivealternatives (e.g., in-house, outsourced, or competition).
- Under-priced products will create revenues without acceptable margins.
- Optimum pricing correctly balances costs, revenues and profitability — creating the pricing
“Sweet Spot” that optimizes financial performance.
Optimum pricing is a concept based on the precept that products and services should be priced and differentiated on the basis of the value, or worth, to the customer. The value, or worth, to the consumer is determined by considering a number of factors that together constitute perceived value:
- Utility The utility of a product or service is determined by its ability to satisfy the needs and wants of the user in terms of time, place, or possession.
- Alternatives The availability and number of alternative products or services which can be substituted for similar utility available to the customer. Alternatives can be pro- vided by competition or from in-house capabilities.
- Perceptions Customer perceptions regarding a product’s or service’s ability to deliver utility or need fulfillment may not be accurate. When perceptions differ from real utility, perceptions will influence the value or worth.
- Capacity A market consists of both desire and capacity. Revenues cannot be generated even if the product or service is desirable if customers cannot pay the price.
Products and services should be priced and promoted on the basis of the value derived by the customer by ituse rather than on “what the market will bear” or on what it cost to offer the product or service in the market. If the product or service is of superior value, pricing should reflect the value provided.
Conversely, if the product or service has identified weaknesses or shortcomings, the price may not, or shouldnot, meet prevailing market prices. Offering a product or service in terms of the value produced is ameasurable concept. A demand curve, or calculation, for a product or service can be created based on the demand for the product or service at varying prices. The optimum price is the price that maximizes profitability.
Retained Earnings Stockpiling
Increasing retained earnings is a result of the integrated achievements associated with margin protection and revenue growth along with policies related to increasing the “war chest” through retained earnings that provides future options that, in turn, support further improvements in margins and revenues.
Identify your path to CFO success by taking our CFO Readiness Assessmentᵀᴹ.
Become a Member today and get 30% off on-demand courses, tools and coaching!
For the most up to date and relevant accounting, finance, treasury and leadership headlines all in one place subscribe to The Balanced Digest.
Follow us on Linkedin!