The Physics of High Growth

What it takes to send a Rocket to the Moon

Imagine what it would take to safely send three astronauts to the moon

saturn rocket

and back. There is the weight of the astronauts, their life support system, instrumentation, the capsule they are in, and some way to land

on the moon and explore. That comes to around 22,550 lbs. total.

What it takes to get that payload to the moon and back is something totally different. It turns out that the total weight of the rocket that is needed is about 6.5 million lbs.

In other words, 99.65% of the total weight is required to

take that net payload of 22.5K lbs. to and back from earth. As crazy as that sounds, NASA actually came up with an ingenious design to reduce the total weight to that. The Saturn V rocket has three stages, with each stage focused on accomplishing one thing, and then basically being discarded to reduce the remaining payload. Here are some fascinating numbers:

 

Stage 1

  • Weight: 5.1 million lbs. or 78% of the total weight
  • Approximately 72% of the fuel and 78% of the total weight was to carry the payload 5% of the distance.

Stage 2

  • Weight: 1.06 million lbs. or 16% of the total weight
  • Approximately 22% of the total fuel is used in this stage to take the remaining payload 19% of the way

Stage 3

  • Weight: .262 million lbs. or 4% of the total weight
  • Approximately 6% of the total fuel is used in this stage to take the remaining payload 75% of the way

soma-rocket-fuel-consumption

Think about this for a minute:

  • 94% of the entire fuel is used up to take the astronauts only 25% of the way. That’s what it takes to overcome inertia and achieve the necessary escape velocity so as to actually reach the target.
  • But once escape velocity is reached, only 6% of fuel is needed to make 75% of the journey!

 

What this has to do with Revenue Growth

What we saw in the example of the rocket ship is Newton’s first law of motion at work:

“An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.”

In the case of an existing business that is growing at a certain pace a year, it will continue to grow at that pace unless something different happens—“ an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.”

The First Law of Motion tells that it will take a significant amount of effort to change speed and direction of a business. An “unbalanced force” is necessary to change that. Let’s see how much of new force we need.

The Funnel Math of High Growth

The principle behind the launching of a rocket ship holds true for growing revenue. The calculations are however, different. And fortunately, they are simpler.

SOMAmetrics uses a Four Funnels approach to define the marketing, prospecting, and sales efforts needed to achieve a new level of sales. Some assumptions are made to illustrate the funnel math calculation:

Parameter Value Remarks
Current Revenue ($) 10,000,000
Targeted Revenue ($) 12,000,000
Net growth needed ($) 2,000,000
Average Deal Size ($) 50,000
Avg. No. Won deals needed 40 40 wins @ $50,000 average = $2million net new
Avg. closing ratio 20.0%
Sales Opportunities needed 200 Opportunities needed to close 40 deals
Prospecting conversion ratio 10.0% Number of opportunities converted from calling efforts
Marketing conversion ratio 2.0% Number of opportunities from
Blended conversion ratio 6.0% Average conversion ratio of marketing and calling
Marketing/Prospecting Leads needed 3,333 Total prospects needed to reach target
 Avg. touches per prospect  20  Calls and emails per
Total touches needed 66,667 Total touches needed to reach target

The above chart tells us the effort required to generate $2million in net new revenue.

  • We will need about 40 closed deals, each an average size of about $50,000.
  • At an average closing ratio of 20%, we will need 200 sales opportunities.
  • In order to get those 200 sales opportunities, we will need to touch around 3,333 prospects each about 20 times, or a total of 66,667 touches in a year. That’s a lot of emails and calls.

As in the case of the Saturn V rocket, we need a lot of effort (66,667 calls and emails) to get to some result (produce 200 sales opportunities for the sales team).

However, once we get things going (achieve escape velocity), it takes less effort to gain more revenue. These 40 customers may end up spending $500,000 or more each over their lifetime. They may give us other referrals, and that will come at lower cost and effort than going after a new customer from scratch, and their testimonials and case studies would make it easier to get new customers.

Yes, once we achieve escape velocity, it will take a disproportionately small amount of effort to get larger amounts of revenue (6% of fuel to go the rest of the 75% of the journey).

The big question is—where do we get the resources to achieve that escape velocity? Where will the 94% of fuel come to get us started on our cruising speed?

You can acquire a number of automation tools, not to mention hire a dozen new expert and mangers for them. In other words, build your own spacecraft to go to the moon.

Or, you can focus on your core business and leave the rest to a partner that already has made the necessary investments. Buy a ticket for a ride in a rocket moon.

After all, what you really want is to make sure that your sales reps have a full pipeline of high quality leads so they can focus on closing as many as possible. By working with a partner that has already made the investment, you can make your limited resources count for more and begin realizing results much sooner than you would if you had to setup the whole thing yourself.

Please contact me if you have question.

The ABC Gap of High Growth

The ABC Gap Dilemma

Somametrics abc-gapEvery company has some form of an ABC Gap: ‘A’ is where a company is today, ‘C’ is where it wants to be, and ‘B’ is its bridge (what it needs to do) to get from A to C.

The idea is that to the extent that a company is able to chip away at the gap between ‘A’ and ‘C’, then it is likely meeting its growth objectives on a consistent basis. Managing this gap and successfully moving closer to ‘C’ is what all executives spend most of their time doing, especially CEOs.

One important question is: when companies find it difficult to meet their growth objectives, is that because they don’t have a good plan ‘B’, or are they having difficulty executing on ‘B’?

What our research and experience shows is that it is more often the latter. Execution is the key challenge primarily due to resource constraints. Sometimes, a company doesn’t have certain skills it needs to execute the plan. But more often the case is that its people are already busy doing what today demands and don’t have the time to do the work that tomorrow demands.

In other words, when today (‘A’) competed with tomorrow (‘C’) for the same resources, almost always, it is ‘A’ that wins.

The reasons for this are well documented in books such as The Innovator’s Dilemma by Michael Clayton of Columbia University as well as in books by marketing consultant Geoffrey Moore (Dealing with Darwin and Escape Velocity).

We believe, however, that the reasons documented by these noted experts primarily apply to larger companies, and that smaller companies face a different ABC Gap challenge. This article discusses this issue from the perspective of a small company and attempts to provide a practical solution.

The Nature of ABC Gap

soma-generic-bus-mondelRegardless of industry, almost all companies must handle three generic business operations: they must continuously innovate and bring out new products and services, they must take these products and services to market, and they must fulfill the demand they created (manufacturing, delivering, supporting, and so on). While they don’t have to do all three internally (and indeed that is not the best option), they must execute all three better than competitors to achieve high growth.

The assumption here is that a company continues to innovate and bring out new products and services, which it markets/sells, and then delivers and supports.

However, what seems to happen to most companies is that ‘today’ wins over ‘tomorrow’. In other words, the customers of today, who use the products of today, get the lion share of the company’s resources—both in number and talent—first.

Geoffrey Moore, in his book, Dealing with Darwin, outlines this issue—what he calls “Core” vs. “Context”. According to Moore, Core, which is what differentiates a company, must be continually renewed in order to maintain competitive advantage and grow at a high rate. However, most of the company’s key resources are allocated to “Context”—those things that if not done will result in really bad things happening, but doing them well will not increase growth.

While Context work must be done, it confers no competitive advantage. For example, paying taxes or meeting regulatory requirements are necessary in that the consequences of not doing them can be serious. However, neither enables a company to achieve high growth.

Differences in Small and Large Companies

The Large Companies Go-to-Market Dilemma

When it comes to large enterprises, their greatest challenge is that their new innovations do not see the light of day in time before competitors beat them to it.

Most of these large companies have very good labs and innovation centers where they develop many new products. However, the revenues that would come from these new products are so dwarfed by the overall revenues from existing products that they get little or no top management attention.Eventually, they die at birth from lack of attention.

A case in point is Apple’s infamous Newton. When Apple launched its first Macintosh computer, it celebrated the day it passed the million-dollar mark with champagne.

The Newton, however, did not get the same treatment. Although it generated far more dollars than the first Macintosh ever did, it was considered a dismal failure and scrapped. Why? Because by then, Apple was a multi-billion-dollar company and their existing products were generating many tens of millions if not hundreds of millions of dollars in revenues.

For big companies, the challenge is not that they don’t innovate sufficiently, Typically, it is that they never get enough “go-to-market”resources for these innovations to take off and become successful.

Small companies, however, face a different challenge.

The Small Company’s Innovation Dilemma

For smaller companies, the challenge is quite different. Typically, it is finding the resources to build new products. The visionary founders are never short of ideas. However, bringing these ideas to fruition seems to be the challenge.

The reason for this is pretty much the same as for large companies. All available resources are used to support the existing products and the existing customers that use them. In fact, their best engineers often work to fix issues for important customers, rather than working on new products.

And since support people are usually less expensive than engineers, they tend to have very large support organizations compared to their engineering department. It is common to have a ratio close to as much as ten support people for each engineer they have. As more support people are hired, there is less money to hire engineers, requiring more support people to patch together products, etc.

Every CEO of a small company knows this problem too well. But where to find a practical solution that takes care of today as well as tomorrow?

Outsource what’s Context

There is one strategy that small companies can use effectively to free up scarce capital so they can close their ABC gap:

Hire for Core and outsource as much context as possible.

This strategy enables a company to get two benefits in one fell swoop: free capital for Core and improve the quality of Context work, both at the same time.

Outsourcing Benefit 1: Focus

The problem with Context is that it tends to take over and create a distraction. Employees are human beings with lives, and lives are complex. The more employees a manager has reported to her, the more time she spends dealing with “people” problems separate from the functional or business problem over which she has responsibility.

By definition, context is work that must be done since not doing it will create very bad problems. However, doing context work in no way improves the competitiveness of a company.

Think of it context as a bad headache. You can’t ignore it when you have one. But not having a headache does not mean you don’t have any other problems. It just makes it harder to solve other problems with a bad headache.

Outsourcing context work is essentially outsourcing the headache so you can focus on solving the real problems you need to solve without the distraction of the headache.

Outsourcing Benefit 2: Flexible Spending

Another important benefit of outsourcing Context is enabling a company to pay for what it needs when it needs it and at a higher level of expertise, instead of committing to “bulk purchase” of resources it can’t fully utilize.

For example, a typical B2B marketing operation may consist of the following tasks: building and managing campaign lists; developing new content; maintaining the company website and its social media properties; managing outbound and inbound campaigns, and more.

Each of these tasks is a specialty area with its own best practices. Hiring a specialist for each task is usually overkill for a small company. So, what typically happens is that smaller companies hire a couple of people in their marketing department and have them basically divide the tasks.

Since each marketing staffer cannot reasonably master more than one area, he or she will end up learning just enough to complete the task, but not enough to do it exceptionally well. That is all he or she can do given the amount of learning required and the limited time they have to master each area.

Compare that with an agency that has several specialists, each focused on a single area of expertise. Because each is an expert, whatever work they do is done at a higher level of effectiveness. At the same time, the client company only pays for what it needs when it needs it.

This enables the company to utilize a small portion of its available resources for Context work, and have it done even more efficiently and at a higher level of competency than it would internally.

How to Decide what to Outsource

The chart below provides a short analysis for making a decision to hire versus to outsource.

Function Category / Decision Analysis
Sales Core/Hire Sales needs to partner with buyers in order to effectively sell products and services. The more complex the solution, the more strategic the relationship and the more it needs to be in-house. Winning a deal greatly depends on the sales rep’s ability to forge trust and build partnership with the buyer.
Business Development Context / Outsource This is a very high-volume short-relationship engagement. Potential buyers will remember if this goes bad, but will not remember if it goes well. No company wins customers because the person who first called them and set an appointment with a sales rep impressed them.
Marketing Context / Outsource While the development of a marketing strategy should never be outsourced—it is what the top level management does—the execution of the marketing strategy is largely context and confers no competitive advantage to the company.

Most often, companies mistake strategy and execution. Execution on the strategy requires expertise that most companies do not need to develop—content creation, messaging, list management, campaign management, etc. There are many firms that have both the expertise and the advanced systems to do this work more efficiently than any company could or should internally.

Innovation / Development Core/Hire For most product companies, this is where their competitive advantage lies. While there are aspects of product development that are context (quality assurance, release management, etc.), the actual design and development of products should be an in-house operation.

We should make the distinction between a product company developing in-house versus say a financial firm outsourcing the development of an App to an independent agency.

Customer Support Context / Outsource Many companies can get away with outsourcing their customer support operations. The key is to make sure that the company to which they outsource would provide at least the same level of support to customers as they would.

In reality, however, many companies do not feel comfortable outsourcing this operation and tend to hire in-house.

Finance, Accounting, HR, IT Context / Outsource Generally, these areas of operation can safely be outsourced. The key is to have a very senior and strategic head with a very thin in-house operation managing by results the efforts of the outsourced team.
Legal / compliance Context / Outsource For companies that are in a highly regulated industry, the consequence of getting on the wrong side of the law can be very grave. Therefore, although this is clearly context, it is so mission critical that most companies will have a hard time outsourcing this function. The key is to really understand the risk and manage it in the least costly way for the firm.

 

Predictable Revenue Model

A Predictable Revenue Model enables a company to become a market leader by unleashing its full revenue potential so it can consistently achieve a high growth rate, year after year.

Why High Growth Rate Matters

Companies that grow at a high rate tend to be market leaders. Market leadership is important because brings with it strong financial rewards, such as high valuation and high profitability.

  • Customers generally prefer to buy from market leader, as they feel it is less risky to do so. This naturally reduces the cost of marketing and selling for the market leader. Furthermore, customers expect to pay a premium for buying from the market leader. Higher prices at lower marketing and sales costs translate into higher margins.
  • Vendors as well prefer to work with market leaders and are willing to give favorable pricing and terms to gain their business. This further enables the market leader to keep input costs low while charging premium prices for its products and services.
  • Finally, market leaders have less recruiting and hiring costs compared to their competitors, while still attracting the best talent.

More profits and better talent will eventually result in greater competitive barriers being erected, enabling the market leader to become dominant for possibly a long time.

Clearly, high growth rate matters. The real question might be how does one achieve it. And how much should that rate be? And how much will this expensive initiative cost?

A Predictable Revenue Model attempts to provide answers to these critical questions.

Structure Predictable Revenue Model

A Predictable Revenue Model (PRM) has three main phases: plan; execute, and learn. Each has its own role to play, but all three have to work together to deliver the true power of PRM.

  • Plan
    • Targets
    • Metrics/KPIs
    • Resources
    • Execution Plan
    • Budget
  • Execute
    • Setup
    • Nail
    • Scale
  • Learn
    • Measure
    • Analyze
    • Adjust
    • Document

These are the components of a Predictable Revenue Model, whose purpose is to enable a company to become a market leader by unleashing its full revenue potential so it can consistently achieve a high growth rate, year after year. It is agile, constantly renewable and repeatable, and it should work in any company.

How to Fix Missed Revenue Targets

In our work with clients, we have identified three fundamental reasons why companies have missed  revenue targets

  • Not enough opportunities in the sales pipeline to start with
  • Not enough of these opportunities are closing
  • And the ones that close take too long to close

Fixing these issues can have very significant consequences on revenues.

  • Improving pipeline provides directly proportional results. A 100% increase in Sales pipeline will result in a 100% increase in new sales, provided the quality of the incremental pipeline increase is comparable. In many cases, companies can grow their sales pipeline by two to five times by utilizing dedicated Business Development Reps (read Case Study).
  • Improving closing ratios, however, can have more than a one-to-one impact on incremental sales. It depends on what the delta (the difference between the old and the new closing ratio) is compared to the old closing ratio. For example, if the old closing ratio used to be 15% and this was improved to 20%, then this alone will increase new sales by 33%. The same 5% improvement when going from 20% to 25% will produce only a 25% increase in new sales—which is still a substantial increase.
  • Similarly, reducing sales cycles can have a dramatic impact on new Sales. The analysis of the effect is a bit more complicated and we discuss some of the consequences here. However, briefly stated, reducing the time it takes to close deals makes revenues more predictable. This, in turn, enables a company to invest aggressively with more confidence in areas that impact its growth and profitability. Which only improves pipeline development, closing ratios, and sales cycles–creating a virtuous cycle.

In this article, we first define the problem and its causes. We then recommend some solutions we have seen work for other clients.

 

Insufficient Size of Sales Pipeline

Typically, when a company’s sales pipeline is shallow, it is primarily because it is relying on its Sales organization to build the pipeline, rather than on Marketing.

Ideally, two thirds of a company’s sales pipeline should come from leads generated by Marketing Operations, either through outbound campaigns or from inbound leads.

However, in many of the companies that miss their revenue targets, the opposite is true. Far too few leads come from Marketing, and sales reps are expected to prospect and build their own sales pipelines.

However, today, this is a nearly impossible task, and we discuss the reasons why in in a blog, “Why B2B Sales is no longer working”.

 

Low Closing Ratio

While the issue of Insufficient Sales Pipeline is primarily about quantity of leads, the problem of low closing ratio is one of poor quality leads. The issue is that “leads” that sales reps are working on are not yet well qualified.

These leads may be unqualified for one or more of the following reasons:

  • The prospect doesn’t have a compelling need.
  • The prospect has a compelling need, but there are too many show stoppers to make it work for the prospect

The likelihood that these kinds of prospects will become customers is very low. So why would Sales work on these?

There are a number of reasons why Sales take on leads that are not ready:

  • Marketing campaigns are probably not focused enough
  • Marketing is passing on to sales any “Lead” without first qualifying these
  • Because sales rep don’t have sufficient sales pipeline, they tend to be apprehensive about letting go of even unqualified leads

This is a highly unproductive use of expensive sales resources. Yet, we see it happening far too often.

 

Prolonged Sales Cycle

In many ways, this is a variant of the previous problem. Eventually, a lead may closes, but it takes far too long. The reasons are the same as for those that don’t close at all:

  • Not enough ROI for the prospect to move her along quickly
  • Too many things that have to be overcome on the company side before a prospect agrees to sign
  • Working with a prospect that has no decision making authority
  • Working with a decision maker that doesn’t have a budget this year

Any of these reasons can cause a stall. In the meantime, sales reps continue to hang on this deal thinking it will close next month, and if not then, the month after… The close date on these deals keeps shifting forward—from one quarter to the next. Each quarter’s forecast is missed.

As in the case of low closing ratio, the problem of prolonged sales cycle is a quality problem.

 

Fixing Insufficient Sales Pipeline

The key to building sufficient sales pipeline is building a robust b2b Marketing Operation.

  • Focus on the prospects that have the most compelling reason to buy.
  • Refine your message to make your case quickly and clearly to them
  • Educate and empower them with information so they know they are working with a company that understands their pain and potentially has a solution for their pain.
  • Contact them at the right time so they welcome your calling them
  • Have a Business Development Rep (BDRs) call, qualify to make sure he or she is talking to the right person and schedule time with one of your reps.

 

Fixing Low Closing Ratios

If a sales rep’s pipeline is filled with good quality leads, she is not going to be apprehensive about letting go the ones that are not likely to close. And because she lets those go, she will give her full attention to those that have a high probability of closing, which only increases the odds that these will close.

The solution, therefore, is to keep the sales rep’s pipeline 80% or more full at any given time. For example, if the ideal closing ration is one out of three, and a rep must close 20 deals a year to make her number, she needs about 60 high quality deals in her pipeline. At least 80% of these should come from Four Funnels operations (she can make the remainder through referrals and her own prospecting).

The key point here is to generate the necessary number of Marketing Qualified Leads (MQs) first. However, these should be well qualified before passing on to the sales team.

 

Fixing Prolonged Sales Cycles

By definition, leads that have a high probability of closing are the ones most motivated to solve their problem in the short term. This addresses the final problem of prolonged sales cycles. Motivated buyers have a timeline they need to keep and communicate that clearly. Whether they buy from you or your competitor, they will have arrived at a decision by then. There is no stalling.

The fix to long sales cycles is to improve the quality of the pipeline. The sales pipeline should only consist of highly motivated prospects with decision-making authority. The best practices for fixing this quality problem is to use a Four Funnels Methodology that enables you to control what’s in the sales pipeline.

While Sales reps are more than capable of qualifying prospects, they rarely do it since it is hard to connect with busy decision makers. It requires a great deal of dials to reach even decision makers that want to talk to a vendor. A BDR can make 80-100 dials a day and is far more likely to catch a prospect and make the appointment.

The conclusion seems to point to focus. First, focus on the right prospects. Then, focus the right skills on the right job. Let Marketing take care of the harvesting, let BDRs qualify and find the nuggets. And let your sales reps focus on closing the most motivated prospects. This is the Four Funnels Framework at work.

 

How to Get Ahead by Conducting Internal Assessments

the power of internal assessments

The Importance of Internal Assessments

Every CEO wants to achieve Predictable Revenue Growth. However, companies that struggle to meet their revenue targets are often puzzled by their lack of results while continuing to engage in detrimental business practices.

Here are some of the issues that our clients have struggled with:

  1. A team could reduce the amount of time spent on fulfilling customer orders by 40% through a simple change in workflow.
  2. A company that generated 57% of its revenues from just 2% of its customers was devoting  80% of its sales team’s efforts toward pursuing exactly the wrong types of customers.
  3. A company that was meeting its sales targets could not understand how cash flow was always a problem. It found out that 18% of its closed deals never converted into invoices because newly signed up customers canceled after experiencing frustration with protracted onboarding processes.
  4. A ten person sales team that received an average of 3,000 leads per month felt that they were not receiving enough leads. An interview of the team revealed that the team was getting such low-quality leads that they had stopped even looking at them.
  5. A sales team that was expected to meet its quarterly revenue goals with an average of 50 deals was not meeting its revenue goals even after turning in over 100 signed contracts per quarter. Despite this discrepancy, the sales team thought it was working hard and doing well.
  6. A company that was struggling to meet its revenue objectives repeatedly claimed that the number one predictor of a closed deal was a site visit by a prospect. Yet, the company didn’t have a single program for drawing prospects to its site or in any way increasing site visits by a prospect.
  7. A company that repeatedly told its sales team to focus 80% of their efforts in selling a new product saw no progress until they walked through the process of selling this product and found a number of roadblocks that had to be removed.

You may be thinking, “Well, those circumstances should have been easy to prevent in the first place. Our problems are more complicated than those.”

Perhaps they are. However, in each of the above cases, the company had a smart and hardworking management team in place.

So, why were these relatively straightforward issues allowed to persist for months, sometimes years, before being discovered?

One major reason is that all of the above issues were deeply entrenched within the everyday routines of company employees. Business operations had functioned smoothly that way in the past, but as the company added more products and sought different kinds of customers, or as customers themselves changed, as they often do, what used to work well no longer does.

Longtime employees of the company will find it difficult to notice these changes because what is routine tends to fade imperceptibly into the background.

That is why internal assessments conducted from an outside perspective are imperative. Outsiders are needed to ask “obvious” questions, some of which can be found here, that still manage to stump company employees.

Though it may be tempting to conduct an internal assessment yourself, internally-led assessments lack efficacy for various reasons. It could be very difficult for your Management Team to set aside a whole week for  thorough internal assessments. It might be even harder for your team to stay objective and intellectually honest in asking tough questions, especially in explaining why they continue to do what they do.

Stop spending money on what is evidently not providing you with the results you expect, and get outside perspective. Arrange for thorough investigative internal assessments of your company–starting with Sales, then Marketing, then Customer Service, and finally with products.  These should be completed in about a week to maximize the learning and better connect the dots.

If you seriously want to achieve Predictable Revenue Goal, you must know what is preventing you from doing that. To effectively root out the problems at hand, , you need the analytical lens of an external source  to come in, interview, review, analyze, and report back to you within a week.

SOMAmetrics has the expertise to conduct a thorough assessment of your company’s systems, processes, and people. Call us at 510-206-9263 for a free initial consultation.

Why Predictable Revenue Growth is Vital and How to Get It

predictable revenue growth

What is Predictable Revenue Growth

When we have Predictable Revenue Growth, we can set our revenue targets each year and achieve it within a narrow margin of error (no more than 5%). Not only that, we can also determine that each year’s growth rate will increase by an accelerator amount (20% for example), continually stretching our capabilities towards a high performance company.

To illustrate, let’s assume that our revenues are $10,000,000 for the year.

To attain Predictable Revenue Growth, let’s say we set our first year growth rate to 15% and decide to accelerate that rate by 20% each year, which is another way of saying we will commit to a 20% incremental improvement each year Here is what the first five years would look like:

Year 1Year 2Year 3Year 4Year 5
15.00%18.00%21.60%25.92%31.10%
 $11,500,000 $13,570,000 $16,501,120 $20,778,210 $27,241,065

Five years later, we would be growing at 31% rate and our revenue per year would have grown 270% to $27.2million per year.

Let’s assume we were able to extend this through year ten. The numbers would look as follows:

Year 6Year 7Year 8Year 9Year 10
37.32%44.79%53.75%64.50%77.40%
 $37,408,738 $54,164,022 $83,275,944 $136,986,642 $243,009,789

Now, a number of companies have shown growth rates even higher than this, year after  year. But let’s say that growth rates cap at around 50% per year after the eighth year. The revenue growth in the tenth year is still remarkable at a whopping $182 million per year, as illustrated below:

Year 6Year 7Year 8Year 9Year 10
37.32%44.79%50.00%50.00%50.00%
 $37,408,738 $54,164,022 $81,246,033 $121,869,049 $182,803,573

This is the power of Predictable Revenue Growth—it enables the transformation of a company into its true potential.

There is a reason for setting the acceleration rate, rather than just specifying a growth rate. Companies do not become great overnight. It takes a great deal of hard work and discipline, not to mention capital and talent, to grow at a high rate. The acceleration rate is the rate at which a company commits to improving its best practices, its processes and systems, its products and services, and its people.  Each year provides the fundamentals for the next year while at the same time stretching a company’s capabilities further than the year before.

To be sure, setting and achieving a flat growth rate of even 15% a year is an admirable enough accomplishment. However, adding an accelerator rate on top of that 15% while at the same time setting targets for improvement over the prior year, is the difference between a good and a great company.

Setting these two numbers is only the starting point. The real question is how we will execute on these numbers, which depends on two fundamental changes that must happen. As these are the most challenging hurdles that a CEO faces, it is important to first clarify why Predictable Revenue Growth is vital to the future of a company.

Why Predictable Revenue Growth is Vital

Without Predictable Revenue Growth, a company’s future is always uncertain.

Predictable Revenue Growth is the difference between precarious survival and a sustained leadership position in the company’s chosen market space.

Companies that do not strive to achieve a predictable revenue growth (and do not know what levels of revenue they achieve by year end) are leaving their destiny in the hands of outside powers. A hiccup in the economy, a new regulatory requirement, a new competitor, or the loss of a major customer—any and all of these can happen and do happen. When they do, they can have a devastating impact on company revenues.

When companies commit to achieving Predictable Revenue Growth, they are forced to ask and answer some very fundamental questions that will enable them to improve their competitive advantage and market standing, which will in turn provide powerful protection from the adverse effects of outside threats.

Since setting Predictable Revenue Growth requires detailed planning to achieve that growth rate, the company is always prepared for the future. Instead of being a victim to the vagaries of an unpredictable future, it creates its own knowable future and makes it far more predictable.

The next section describes the process for achieving Predictable Revenue Growth and transforming into a high-performance company.

How do we Achieve Predictable Revenue Growth

Setting targets for Predictable Revenue Growth is the first important step, but how do we achieve this growth rate? What is a practical process of transformation for a company that has not yet achieved Predictable Revenue Growth?

In transitioning from non-predictable to Predictable Revenue Growth, a company essentially goes through four stages of performance changes—Internal Assessments, Optimization,  Strategic Refocus, and Strategic Expansion.

Stage 1: Internal Assessment

The first step towards achieving Predictable Revenue Growth is understanding why you are not currently achieving that.  You can find some useful resources here to help you get started on assessing your sales, marketing, customer service, and product innovation capabilities.

This step is discussed in more detail in this article.

Stage 2:  Optimization

No matter what we believe, we all have more untapped resources and capabilities than we think, as very few companies systematically work to efficiently use their full potential.

Once we understand what hurdles are preventing us from achieving Predictable Revenue Growth, the next step is to focus on the low hanging fruits where we can make immediate gains, typically within the next 60 days.

Once we have taken inventory of what we do and don’t have, the process of Optimization continues to clean out what is no longer relevant, focus on what we can actually accomplish, and free up time and resources, which enables us to move to Stage 3.

Stage 3: Strategic Refocus

The next step is to examine the various market segments our company is currently pursuing and to select the one we can most likely dominate within the next 24 months. Too often, we see company websites and email communications claiming that “Company ‘X’, the leading provider of…” However, this is a self-proclaimed status rather than one awarded by the market.

What we are advocating for is true leadership demonstrated by the following elements: : near-total name recognition and market share, acquisition of key accounts for which all competitors vie, and clear leadership in revenues and profitability.

The exceptionally high rewards of focusing on a specific niche are well documented, as every leading company in any sector has achieved their status by manically focusing on one (and only one) niche market. Still, making the decision to focus on a single market niche can be incredibly daunting. For various reasons, this is the hardest step for most companies to take.

However, while we waste time hesitating over this decision, our competitors who have already chosen a single niche will outperform us in sales, profitability, and overall market leadership. Not only do these competitors produce more focused messaging that is clearer and more compelling to customers, they also have more targeted products and services that better address their clients’ needs. This focus turns each client into a great testimonial—which is far more effective at winning new customers than self-proclaimed statements of leadership.

As customers, we understand this. It makes sense to us when a vendor specializes in a narrow area and has exactly what we need. For example, if we were a healthcare company looking for an accounting system, we would want a vendor that has strong leadership in providing accounting systems to the healthcare industry.

And yet, when we are the vendors, we forget that customers want a specialist, not a generalist. Selling accounting systems in a generalized fashion would involve minimizing the differences between a healthcare and a mining company, for example, by telling both that we have exactly what they need.

We would be more successful if we start with one market segment, win a strong leadership position, and then leverage that to enter the next market segment. Utilizing that strategy would make our sales, marketing, product and support organizations more differentiated and more effective. This results in better closing ratios and shorter sales cycles, which produces high revenue and profit growth rates.

As scary as it seems to focus on only one niche, it is the strategy that works. Preparation is the key to addressing that fear of focusing on a single niche, and the company assessment we conducted in Stage 1 becomes the raw material for analyzing the best niche market for us to serve at this time.   The commitment is to win a dominant position within this niche—at least 35-40% market share—within 24 months.

As counter-intuitive as it seems, the danger is typically choosing too big a segment, rather than choosing a small one. We should take care to choose a niche in which we can be the biggest fish in that pond–we don’t want to be  a minnow with no power.

Once we pick our niche, we can now apply The Four Funnels Framework discipline to align marketing and sales and run our operations by the numbers.

Niche marketing is the necessary and sufficient condition that must satisfied to attain Predictable Revenue Growth, and knowing which niche to pick requires conducting an internal assessment.

Stage 4: Strategic Expansion

Once we successfully complete Stage 2 and have become a much more focused company, we should now be acquiring new customers at a higher speed than ever before. Sooner or later, we will reach a saturation point, as we have picked all of the ripe fruits off that tree. Whatever is left is likely not worth picking.

So, how can we continue to grow at all, much less at a higher rate than before, when there is no more fruit left to pick?

To continue with that metaphor, we grow by planting more trees, of the right kind, and by allowing sufficient time for these to mature and bear plenty of fruit. In other words, we must allow 2-3 years of strong investment in any given niche to realize strong harvest at the end.

The work in the second year of Predictable Revenue Growth is to systematically analyze potential new market segments and ask some important questions:

  1. Where do we see market segments in which our core competency appears to address the challenges these markets face?
  2. Which of these market segments:
    1. Has a compelling need that we can fully address with a reasonable level of investment on our end?
    2. Has relatively light competition?
    3. Is well funded enough to afford our products and services?
    4. Offers access to the decision-making team and process?
  3. How do we verify these segments?
  4. Which are the marquee accounts we must win to create a domino effect in that niche?
  5. Which key partners do we need to start working with?

The work starts in the second year (even though we are still committed to a two-year single-minded focus on our current niche) because it takes time to do this work and come to a strong agreement and commitment on each subsequent niche.

In each niche, we must continue to implement The Four Funnels Framework to continually acquire new customers and remain into a dominant position.

This third phase must become an ongoing conversation within the company, year after year, so that we continuously and systematically explore new market segments we can enter. The Four Quadrants of High Growth provides some of the internal processes for efficiently moving from Stage 2 to Stage 3.

Some examples of companies that are excellent at this are Amazon and Google, which continually look for other markets that could use their core capabilities and always push the limits of their influence and capabilities in highly disciplined and targeted ways.

Hurdles to Achieving Predictable Revenue Growth

Let’s say we are convinced that Predictable Revenue Growth is vital to our company, the three implementation Stages make sense to us, and we are ready to start. What are the hurdle(s) we must overcome?

The single most difficult hurdle to overcome in order to achieve Predictable Revenue Growth is the commitment to change.

  • Internally, change means changing the culture of the company towards one that values and rewards performance, perhaps over loyalty and personal friendships.
  • Externally, it means moving away from a broad marketing and sales efforts to one that is focused on a specific niche that has been judiciously chosen after well-thought out analysis.

There are other hurdles, such as lack of capital or talent required to make the needed changes. However, any company that is able to commit to the two changes above will find a way to procure the talent and the capital needed to make the necessary changes.

Cultural Change

Every CEO knows that changing the culture of a company is the hardest thing to do. Still, no company can significantly improve its performance without making fundamental changes to the status quo.

At its core, changing the culture of the company really translates into the way things are done at the company—  how power and influence works, what is rewarded and recognized, and what is not.

If some in leadership positions today lack either the willingness or capability to drive a high-growth agenda, they may need to replaced by others who can drive performance.  While this may sound logical, for many CEOs–especially founder CEOs–this is the hardest part. Many in leadership positions are personal and loyal friends who have been with the company since the beginning. Removing them from positions of power and influence can be very difficult for a CEO to do.

There are many excellent books on how to manage change and transition, and the thesis seem to be consistent:

  • Be clear with yourself on why the company culture must change. Things must change in order to secure the future of your company, as well as the livelihoods of those who work for you. One cannot continue to do the same thing and expect a different outcome.
  • Communicate this need for change to everyone in the company. Everyone must clearly understand why this is critical and inevitable. Either they are on board with the change, or they need to get off the bus.
  • Require each manager to provide a written plan of action stating what, how, and by when they will achieve key metrics that roll up to contribute towards the determined Predictable Revenue Growth Rate. This is the first step towards creating a Performance Based Culture.
  • Work with each leader to agree on how he or she will be measured—what the metrics and milestones are, when they must be reached, what the rewards are for achieving them, and what the consequences are for missing them. Make sure that this is in writing and is signed by you and the responsible leader.
  • Each leader then would do the same for their top subordinates, who then would do the same all the way down to the individual contributor.

While “Management by Objectives” (MBO) is a well established management philosophy, many companies do not use it. A Performance Based Culture is a prerequisite to achieving Predictable Revenue Growth. Cultivation of this culture has to start at the top, but must consequently permeate every nook and cranny within the company to take hold and flourish.

Market Focus Change

The next major hurdle for a company attempting to achieve Predictable Revenue Growth on a consistent basis is to accept that such sustained and predictable growth comes from focusing on a specific niche, and NOT from casting a wide net.

As discussed above, focusing on a single niche provides a number of important benefits, including 50% or more increase in revenue growth; doubling or tripling profitability; high degree of customer satisfaction and retention; near 100% name recognition in that niche; and 50% or more market share within that niche, resulting in the ability to attract the best customers, vendors, and talents.

Although the benefits are well known and ample evidence exists to support this principle, many companies continue to fear “putting all their eggs in one basket” and prefer to go after multiple market segments at one time.

It is hard to find an example of any major company today that started without a single minded focus on solving a particular problem for a particular group of customers—Amazon did only books until it built its infrastructure and customer base that it later adopted to other products; Google did only search, which led to highly targeted advertising; Apple dominated certain profitable markets with computers, but didn’t explode into what it is today until it solved a single consumer problem—ability to carry all of your music with you on a device that is smaller than a phone. It later did the same with its iPhone. Other examples of companies that focused on only one thing and did it well include Dominos Pizza, Salesforce.com, Uber, and Southwest Airlines.

The second cultural change required is to Focus on a niche and Dominate it. Then leverage profits, name recognition, and market leadership attend in that niche to repeat the performance in the next adjacent niche. Repeat the process for continuous growth. Each niche will require at least two years, and perhaps up to five years, to fully develop. Be patient and stay on the course until you have won at least 40% of that market so you are in the top two suppliers to that market segment.

Conclusion

This article has built a case for why Predictable Revenue Growth is vital to the future of a business entity. It has also explained the necessity of setting clear growth and acceleration rate targets, committing to changing company culture to one of high performance, and committing to a niche market strategy.

SOMAmetrics helps companies achieve Predictable Revenue Growth through the application of best practices, automations, powerful analytics, and expert resources. Please contact us so we may help you achieve Predictable Revenue Growth.

Revenue Growth with Certainty: Predictable Revenue Model

The Revenue Growth Model

A Predictable Revenue Model (PRM) enables a company to achieve 20% or more revenue growth year over year, sustainably and profitably.

Its key benefits are:

  • Sustainable high growth of over 20% per year
  • At least a 30% increase in profitability
  • At least a 30% increase in customer satisfaction

A Predictable Revenue Model is characterized by five traits that are necessary for delivering the above results:

  1. Specific and purposeful focus – when focus and specificity are lacking, people tend to do what comes naturally to them. The end result is that you have people rowing in many different directions and when it feels right to them. As a result, the boat tends not to move much. When specificity and purpose are added, people know in what direction they must row, and at what speed.
  2. A detailed yet simple Execution Plan – It is one thing to say we will grow at 20% a year. It is another thing to work that backwards so that people know what they have to do this week and next to get there. The execution plan is what ties the day-to-day efforts of everyone with the strategic focus so everyone rows in the same direction and at the specified speed.
  3. Systems and processes that are optimized to support the plan – rowing in the same direction and speed implies tools and processes that track and enforce these. Giving people different sizes and shapes of rows will make it harder to row at the same speed and direction. Making the rows the same size and shape, adding a navigation system, having a boat that is streamlined, all these aid in getting to the destination faster and with more certainty. Tools and processes that enforce the plan are a crucial element of a high growth plan.
  4. The right skills and reward system that execute the plan – it now becomes obvious that getting the right people and providing them with the right incentives increases the chance of rowing in the same direction, at the specified speed. You want people that have the natural inclination to do the things you want done and like to be recognized and rewarded for achieving the goals you set for them. You need smart, results-oriented people who don’t mind giving more each year, to get more than ever before.
  5. The constant gathering and analysis of data in order to drive continuous improvement—without continually analyzing data, the only way you can grow 20% or more is if your industry grows faster than that. How many times does that happen? If you gather data and analyze it regularly, you can make continuous improvements that add up to higher productivity than your competitors. Therefore, even if you industry doesn’t grow at a high rate, your company will as it does more business relative to your competitors.

We will discuss each one of these critical components in more detail, and more importantly, how to implement them in the most practical and least resource consuming way possible.

1. Defining a Specific and Purposeful Focus

Of all the five components of a High Growth Plan, this is by far the most important and most difficult to complete. It turns out that the difficulty company Executives face is not intellectual but rather emotional. Many postpone deciding on which markets to focus on for fear of missing out on revenue potential.

Ironically, the fact that there is no focus actually slows down revenue growth rather than increasing it.

Here is a simple test you can perform to find out how true this statement is.

Who do you think makes more money, the heart or brain specialist, or the general practitioner doctor?

In the era of the PC, Microsoft was the largest software company in revenues. More importantly, it took more than 50% of all of the profits of the entire PC industry! Why, because 90% of the PC’s ran on Microsoft Windows, and nearly all of these used Microsoft Office.

Google owns 80% of the search market, which enables it to grow roughly 20% a year, generate over $700,000 in sales per employee—an incredibly high productivity rate.

Apple sells only a handful of products (laptops, desktops, tablets, and phones primarily)—yet it is either the number 1 or #2 company in the world in market capitalization, with over $100 billion in cash in the bank.

These few examples show that focus increases revenue, not shrink it. But even more critically, it has a remarkable effect on profits. Focused companies, which sell a few products to a few markets, tend to have a lower cost of doing business, higher name recognition and market share, faster sales cycles, and overall better customer satisfaction than those that sell many products in many markets.

Which company has better customer satisfaction—AT&T or Apple Computers? Which of the two do you think sells a wider selection of products to more diversified markets?

As Geoffrey Moore, the noted high-tech marketing guru and best-selling author eloquently puts it, “…you do not have to pick the optimal beachhead to be successful. You just have to win the beachhead you picked”. In other words, it is far more important to commit to the decision you made (once you pick a target segment) than it is to make the best decision in picking the right segment.

2. Building Detailed but Simple Execution Plan

Once a market segment is picked, a specific plan for dominating this market segment can be prepared. By dominating, we mean a market share of at least 35-40% of that market segment within a three-year period. That is the goal of the plan.

The next phase is to define how you will achieve the plan. Your plan has to take into account three separate but highly inter-related sets of activities to achieve the desired goal: Marketing, Sales, and Delivery.

At SOMAmetrics we advocate the use of a Four Funnel Framework to integrate Marketing and Sales to achieve the desired Revenues. To give a simple illustration, say you want to achieve $10 million in incremental revenues in 2015 and your average deal size is $50,000. That means you need to close 400 new deals.

Say, your average closing ratio is about 25%. Therefore, you will need to have about 1,600 potential deals or Sales Qualified Leads (SQLs) in your pipeline.  Let’s further say that maybe 20% of all of your Marketing Qualified Leads turn into a SQL. Therefore, you will need about 8,000 MQLs delivered by your marketing department in 2015. If your closing cycle is, say four months, then these 8,000 MQLs have to be delivered by the end of August to make a difference in 2015 revenue numbers.

The above numbers now give us the Planning targets:

  • $10 million in new revenues
  • Four hundred new deals closed
  • One thousand six hundred opportunities (SQLs) in the sales pipeline
  • Eight thousand Marketing Qualified Leads from Marketing
  • Roughly 1.6 million marketing touches to generate the desired 8,000 MQLs

The next step is to figure out how each of these numbers will be achieved in terms of resources and support systems.

  • How many sales reps will be needed to close 400 deals in one year?
  • Where will you get the list of prospects and how big must the list size be?
  • What are the marketing assets you must develop to attract these prospects, and who will be developing these assets? How much time will that take?
  • What kind of marketing campaigns must you conduct to generate 1.6 million touches to your targeted prospects? How often must you conduct these campaigns, and how many times per prospect?
  • If you have to install your products, and train customers on how to use them, you have to timeline the closing of deals and see how many resources you will need to implement what your sales organization has sold.
  • You also have to worry about supporting customers on an ongoing basis. Your plan is to add 400 more new customers this year. How will they be supported? What is the average customer satisfaction rate you are going for? What will that entail to satisfy your customer satisfaction metric?

This is the minimum level of detail required to implement the plan.

Our experience has shown that the degree to which a plan is executed is a function of two critical factors: the level of detail of the plan, and the simplicity of the plan. These two factors, while NOT exactly being mutually exclusive, are hard to work into the same plan and strike the right balance.

3. Implementing Systems and Processes that support your Plan

The best way to manage the work of people is to create the necessary automated processes that guide their work. If we want to make sure that our people are rowing in the same direction and within the same rhythm, we need to equip them with oars that are the same size and shape.

The organizational parallel to this is to standardize the systems and processes that your people use and to encourage them to use these in a consistent way. This introduces an age-old debate about what is the right choice to make, select a system that can do pretty much everything such as SAP or Oracle, or go with a best of breed approach and integrate the systems.

Our view is always to go with the best of breed approach provided you also follow some basic rules:

  1. Use the same rigor to select the system of choice, regardless of whether you are going with a best of breed or a monolithic system.
  2. The total number of systems you use within your company should be the fewest possible and yet allow you to automate all of your major business processes.
  3. Each of your systems should be well integrated with any system that already has the data this system needs to use. In other words, a cardinal rule is that data should always be entered once and used as many times and places as necessary. One crucial design decision is which system should be responsible for capturing the data in the first place, and which systems are to consume this data from that system.
  4. In designing your systems and processes, it is wise to follow a key principle: design for version three, spec out version two, and build version one. That way, you will reap benefits right away while building critical flexibility into your system.
  5. Take a full audit of your systems and processes at least every 12 months to verify that they are still relevant, that you have not outgrown them, and that you don’t have critical gaps in your system and processes that might prevent you from achieving your growth targets.

In our experience, we have found Salesforce.com to be a powerful, flexible, and extensible platform that can handle the requirements of pretty much all small and medium sized businesses today as well as grow with them to meet their needs of tomorrow. Because of the huge amount of applications developed to integrate and extend the core capabilities of Salesforce.com, it is the most affordable platform for running business processes for most small to medium sized businesses.

4. Getting the Right Skills and Reward Systems in Place

The next step is to think about human resources—what kind, how many, and how you compensate them. Right after the first component—deciding on which market segment to focus—this poses the greatest difficulty for most of our clients, especially those that have been in business for ten or more years. This is especially true for those that founded their companies with little or no funds, who hired help they could afford—that is to say cheaply.

In very few instances, these founders lucked out and hired moderately skilled but highly motivated people for cheap. And these extraordinary individuals put in their heart and guts to grow the company along with the founders. Ten years later, they had acquired vast knowledge and experience and are indispensable to the company.

However, the more likely scenario we have seen is that the founders hired moderately skilled and motivated people for moderate pay. Then they used the Peter Principle; promoting people to a new level based on their ability to do their current job, rather than the new one, rewards seniority by putting in place of high power and responsibility those that do not necessarily have the ability to discharge that responsibility effectively.  Furthermore, these managers feel more comfortable with this level of experience and prefer to hire people they feel are less capable than them, rather than more capable.

Sooner or later, the company faces the danger of accumulating moderately capable people who give moderate performance. Newer competitors come out with better products and services, the response to which is to compete on lower price, which further deteriorates the company’s position.

It is critical to hire smart, results and growth oriented people and do everything in your power to keep them:  by rewarding them well, giving them challenging assignments, and recognizing them in front of their peers when they successfully carry out their assigned tasks. It is not just money, but also growth and recognition, along with money, that is the effective reward system for smart, results and growth oriented people. They will work hard, typically 50 or 60 hours each week, to earn their reward and their recognition, and to master new skills. And in the process, will help propel your company into its next stage of its growth.

5. Constantly Analyzing Data for Continuous Improvements

Whatever is not measured does not get attention, and it will never improve. That is well known and accepted. The key to growth and improvement is to bring attention to the very few things that matter—what we call Key Performance Indicators or KPIs.

Each of the three sets of activities we mentioned—Marketing, Sales, and Customer Support—has its own set of KPI’s.

The steps are simple, but they require a high degree of rigor and diligence to actually convert into real results:

  1. Define the KPIs (some we have mentioned above already such as number of SQLs, MQLs and touches; percentage of accepted SQL’s by sales; average sales cycle; average deal size; number of sales contacts to close a deal; revenues by employee; revenue by sales rep; sales cost as a percentage of revenue; marketing cost as a percentage of revenue; time from contract to invoice; account growth rate per year; customer satisfaction rate; and so on.
  2. Design the monitoring process/systems—what is your system of record that can handle your processes and with reasonable ease provide the data you need?
  3. Automate the reporting and management and review of these KPI’s so they are in everyone’s face as frequently as possible?
  4. Set quarterly objectives on moving them a notch to the next level so they are continually improved. Can you get your managers to review data each week and set the next week’s tasks towards achieving these targets?
  5. Work back into the plan the specific changes in systems, processes, and work activities that must happen to obtain those continual improvements.

Take Away

In this article, we discussed how a company that desires to meet its growth objectives on a sustained basis must do five things well, and must do them continually and relentlessly. It must decide to focus on a single or no more than two markets so it can act with purpose; it must develop a detailed yet simple plan; it must build the right systems and processes needed to execute the plan; it must hire smart, results and growth oriented people and reward them the right way; and it must constantly collect and analyze data so it can continuously improve towards sustained future growth.

All five are critical and must be done in the correct order. We also saw that #1 and #4 are probably the hardest to do of the five, and probably because they both require breaking away from the old culture and moving to the one.

However the real cost of not making these changes is falling into mediocrity and possibly risking the company to fail. This is why a company must target a growth rate of about 20% or more each year so it is assured continued viability and relevance in today’s and tomorrow’s market place.

Unleashing Untapped Revenue Potential for Sustained High Growth

What is Untapped Revenue Potential?

Untapped Revenue Potential  (URP) exists in every company.  It is the difference between the revenues that a company is capable of generating, were it to take full advantage of the opportunities available, and what it is actually generating.

This delta is inversely proportional to a company’s rate of growth. The faster a company is growing year to year, the smaller the delta, and vice versa. In other words, companies growing under 20% year to year are far more likely to have significant Untapped Revenue Potential.

Amazon’s S3 cloud storage business (where customers rent online storage space) provides an excellent example of how a more vigilant company sees URP and acts to unleash it. When Jeff Bezos launched Amazon.com as an online bookseller in 1995 with the vision of some day building it into the largest online retail store, he could not have anticipated the Cloud Storage business. So, why get into that business and compete against well-established data centers?

Well, because it made sense. As a natural outcome of its relentless pursuit of becoming the largest online retailer, Amazon developed the necessary expertise and infrastructure to build and run one of the largest data centers in the world. It seemed logical for Amazon to simply build excess capacity and sell the excess to customers that needed the service. In doing so, Amazon not only increased its overall revenue, but it now has double the reason for constantly improving and upgrading its data centers. The need to be competitive on the cloud storage business end enables it to have the fastest, most secure, and most reliable online store, increasing the distance between itself and its online store competitors.

This is the most important definition of a true Untapped Revenue Potential (URP). Unleashing a true URP not only will bring incremental revenue from that new source, but it will also increase revenues you earn from the rest of your business.

Why Untapped Revenue Potential (URP) Exists

Imagine if you had a ten-room house, but you were using only 4 or 5 of these rooms. It could be because you didn’t even know you had the extra rooms. More likely it would be because you didn’t have the resources necessary to make the rest of the rooms fully livable.

And so it appears to be the case with URP. URP exists for a variety of reasons—partly because it gets created without anyone really knowing it, and partly because companies do not pursue what they already know exists.

One important source of URP is the huge amount of features and capabilities that get into very mature products and services as a natural outcome of being in business for several years. As a company grows and begins to handle a variety of types and sizes of customers, it starts building “hidden” products and services for which it never thinks of charging money. The more a company works to accommodate and satisfy an increasing size and variety of customers, the more it creates new sources of revenues that were not available to it before.

Another source of URP is less hidden. Companies actually have products for which they charge money, but they don’t have a systematic program of making sure that their customers are aware of them and buy them. Why? Because the companies typically don’t know which customer has which product and therefore, can’t do targeted marketing and sales.

In our experience, both these reasons tend to coexist, increasing the size of URP. Sometimes our clients indeed were aware that certain sources of revenues were available to them, but they lacked the skills and resources necessary to develop them into moneymakers.  And there were still other sources of potential revenues that our clients didn’t even know existed.

Ten Examples of Untapped Revenue Potential (URP)

If you don’t think your company has URP, take a look at the examples below. Any company that:

  1. Continues to add features into its products and services, as new and bigger customers ask for them, and doesn’t do anything to break the product into several versions, charging more for those that have more capabilities has URP.
  2. Makes complex products and does not have a Maintenance Service Program where its customers purchase assurance that their expensive equipment will be routinely maintained so as to eliminate the risk of costly downtime has URP.
  3. Has customers that are sourcing what it sells from multiple vendors and doesn’t know how much that is, and hasn’t done much to win this additional business has URP.
  4. Does not know the delta between the number of licenses it has sold into an account and the number of potential seats available in that account has URP.
  5. Discounts deeply to win business over cheaper alternatives without explaining to its customers why they are actually saving money by paying its higher prices has URP.
  6. Sells several products and doesn’t know how many of its products are with which customer has URP
  7. Has lower closing ratios and/or longer selling cycles than its competitors has URP
  8. Does not receive sales leads from its customer support organization has URP
  9. Has not built at least 25% of its customers into raving fans that will bring it new customers on their own has URP
  10. Has NOT integrated its accounting/billing system with its marketing systems such that marketing information automatically go out to existing customers based on what they have purchased, when, and how much has URP.

There are many more examples of URP. The question is not “Does URP exist in our company?” Rather it is, “How much URP do we have at our company?”

Identifying Untapped Revenue Potential

The Four Quadrants of High Growth is a the most effective and systematic approach to identifying the URP available to a company by breaking up the total addressable market available to a company into four quadrants. Quadrants 1 and 2 are of existing customers while Quadrants 3 and 4 are of non-customers.

The model helps companies identify the sources of information that reveal the URP in each Quadrant. Once you know the URP in each Quadrant, you can add them up to arrive at the total URP, which then enables you to define and build a Predictable Revenue Model™ for your company.

Quadrant 1

If a given customer purchases say 100 units of a product that you sell, but they buy only 47 units from you, then they are getting the rest (53 units) from other vendors. There is URP of 53 units from this customer. If you then determined similarly for all your customers, then you can come up with the total URP in Quadrant 1 for just that product.  The next question how much of this URP can you tap into in the current fiscal year?

There is another form of URP in Quadrant 1, which is perhaps even more difficult to determine than the above example. Let’s say you sell 47 units to the company and that is all the company is buying—in other words, it has given you all of its business. However, although it has not given its business to anyone else, it still has need for 100 units, since there are other needs in the company that your product could have addressed—a need is latent and unexplored. It is up to you to identify this new need and bring this latent need to the front so that your customer is aware that purchasing more units from you can address this previously unmet need.

Quadrant 2

If you sell more than one product, then your Quadrant 2 URP falls into one of the following categories:

  • Add-ons: These are additional services or components that customers typically need when they purchase another stand-alone product. A Maintenance Service Program or product warranty is a type of add-on that makes sense to sell along with an expensive or complex product
  • If you have two-or more levels of a product or service—for example you have a professional and enterprise edition—then every customer who is on the lower, less expensive version, is a candidate for an upgrade. This gap is part of your URP.
  • If you sell two or more standalone products that nevertheless could be designed to work together such that buying both actually returns higher value than the sum of the cost of each, and you haven’t either done that or are not selling the package, then you have URP left on the table.

Unleashing Quadrant 2 URP requires looking into the design of your products and services such that you can easily add and sell them as packages, as well as making it easy for your customers to upgrade to a higher level of product or service. The more automated these are the faster and easier you can unleash Quadrant 2 URP.

Quadrant 3

Quadrant 3 is what, typically, companies think of when they think of growing revenue—getting new customers. However, this is far more expensive way of generating more revenue when compared to Quadrants 1 and 2, partly because these are non-customers who see you as high risk since they have never done business with you yet, and partly because they already have some way of addressing the need that you want to take care of for them. For them, the devil they know is better than the devil they don’t know.

However, broadening the customer base is still critical to growth since that is the enabler for Quadrant 1 and 2 sales in future. There is a more effective way to go after non-customers in your current market space. Our Four Funnels Framework is an excellent methodology for leading customers from a very low state of buyer readiness in Funnel 1 to a much higher state of readiness to buy in Funnel Four.

The Funnel Math is a precise tool for calculating what you need to do to tap into Quadrant 3 URP. In fact it is the only reliable way you can see the level of investment needed to achieve your desired revenue growth in Quadrant 3 and budget for it appropriately.

Quadrant 4

Working in Quadrant 4 is like space exploration—expensive and risky, but with a lot of upside if done correctly—or think of a home run. It is basically an attempt to answer the question, “What other market segment(s) is/are there that can use our products and services, where our success stories in our current segment are still relevant enough to convince those customers we can help them, and we can do so with moderate amount of customization to our products and services?”

This requires a systematic search of another market sector for you to develop cost effectively—a sector that has a compelling need for a solution that you can bring to market quickly, where competition is not too entrenched, where the customers can afford your solution, and are accessible to your marketing and sales efforts.

Unleashing Untapped revenue Potential (URP)

So, how do you unleash your company’s Untapped Revenue Potential?

There are five key steps to unleashing URP:

  1. Discover all possible sources of URP by systematically working through each of the Four Quadrants—basically doing what we call a Corporate GAP Audit
  2. Determine the investment required (proforma P&L) to tap into each potential source of revenue
  3. Prioritize according to the amount of URP and cost/risk of unleashing each URP source
  4. Define the project plans for the top candidates
  5. Implement the necessary projects to unleash URP

None of these five steps is particularly difficult to do. So why do so many companies leave so much URP? It turns out that the companies that have significant URP never even get past step #1, for a variety of reasons. It seems that that the hardest part for most companies is actually finishing the Discovery phase–perhaps because they don’t have the time or expertise to do that in-house.

This is where outside expertise and resources can make a big difference in getting an initiative off the ground quickly and cost-effectively.

How SOMAmetrics can Help

SOMAmetrics helps companies to identify and take full advantage of their untapped revenue potential so that they can consistently grow 20% or more each year.

SOMAmetrics has developed proven methodologies and best practices for unleashing URP, honed while working at and with over 100 companies with a variety of sizes, maturity, complexity, and belonging to a wide range of industry segments.

Unlike other consulting firms that simply diagnose and prescribe a solution plan, SOMAmetrics goes much further to provide the necessary implementation expertise, project management skills, and resources our clients need to unleash their full revenue potential.

Contact us today to discover and unleash your Untapped Revenue Potential for sustained high growth.