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 1||Year 2||Year 3||Year 4||Year 5|
| $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 6||Year 7||Year 8||Year 9||Year 10|
| $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 6||Year 7||Year 8||Year 9||Year 10|
| $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:
- Where do we see market segments in which our core competency appears to address the challenges these markets face?
- Which of these market segments:
- Has a compelling need that we can fully address with a reasonable level of investment on our end?
- Has relatively light competition?
- Is well funded enough to afford our products and services?
- Offers access to the decision-making team and process?
- How do we verify these segments?
- Which are the marquee accounts we must win to create a domino effect in that niche?
- 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.
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.
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.