“What makes for good revenues?” You ask.
Would you rather own Dollar Shave Club or the Gillette Corporation? Probably the answer is Gillette, because its worth a hell of a lot more. But, the answer could be different tomorrow because of Dollar Shave Club’s good revenues.
Gillette was founded in 1904, has 750M customers and is valued at USD$19B. Dollar Shave Club was founded in 2011, has around 2M members and was valued on sale recently at USD$1B. This means that Gillette’s customers are valued at USD$25 each, whereas Dollar Shave Club’s Members are valued at USD$500 each. They both sell razors! Startling, isn’t it?
Lets have another look, say Engineering firms. I have held commercial and leadership roles in engineering businesses (Avionics, Telecommunications, Machine Tool Engineering, IT ) for half my adult life, so I reckon I have some insight into how they operate.
Your standard engineering business offers design services, and may also offer a bit of hardware, software and installation. Perhaps they also offer maintenance services for the hardware and software. Commercially, their revenue is generated from a customer that they win a big project with, then they may pick up a trickle of maintenance work. If they’re lucky, the customer uses them again for another project in another area.
So what’s wrong with the traditional revenue model?
Firstly the future is always hard to plan on. Forecasting sales is really difficult as your confidence in invoicing dates is low. All to often future forecasts are based on last years data, without any insight on which customers the sales will come from.
Secondly this means they will be generally less profitable as they need to endlessly spend more on acquiring new customers, plus their operational people are expensive but regularly benched.
Thirdly It’s always going to be feast or famine when it comes to cashflow. Times of famine also mean you lose good people!
Perhaps some innovative thinking is required?
When designing an offering to the market, a large number of requirements need to be addressed:
- Corporate strategy alignment
- Customer problems that need solving and their demands for a specific bundle of features and benefits
- Your own operational capability and supplier capabilities
- Legislative, environmental and community requirements
- Internal requirements from marketing, operations, finance, IT and human resources etc, etc
But what I’ve noticed over the last 30 years or so though, is that there is one area which gets very little attention – the underlying commercial arrangements, or commercial packaging of an offer. Everyone tends to use industry norms instead. So that’s what I want to address with this article, and answer the question “What makes for good revenue?”.
Commercial Packaging is the Key to Good Revenues
Experience indicates there are 3 principles of good commercial packaging, that should be considered.
- Low Barriers to Entry
- Maximise your Profitability
- High Barriers to Exit
Pretty simple, yes? So let’s dive a little deeper.
Low Barriers to Entry
So on top of creating products and services your customers value, you want to make it as easy as possible for the customer to buy. So how do you do this? Well, lots of ways (and I’m sure my list isn’t exclusive).
Have a Trusted Brand – Consumers still insist on buying pharmaceuticals from name brands that are chemically identical to the generic brands, but three times the price.
Lower Entry Cost – Large upfront costs can be turned into “one low monthly payment” with financing leases. Mobile phones are costed into contracts rather than having an upfront payment. Colour printers are discounted to make them easy to buy and profits are made from the ink. Some features can be removed and sold back later as “accessories”. Perhaps the type of revenue model (sell, rent, subscribe, licence, usage, brokerage etc) should be altered to lower the cost.
Lower Ongoing Cost – Consumers have a much higher propensity to buy a product with lower ongoing costs but a longer contract, than a higher costing short contract that has the same total value. Lower ongoing costs doesn’t mean you earn less! $100 a week for 10 weeks, isn’t nearly as valuable to you as $50 a week for a year! Its why adding the metallic paint option to your new car costs you another month or two of repayments, rather than increasing the monthly cost. Its why the first service of a new car, appears to be free.
Reduce Risk – “Try before you Buy”, “30 days Free Access”, “Freemium” & the “Money Back Guarantee” are common ways of reducing risk. Some of these cross over as tactical marketing solutions, not underlying commercial packaging, but they are worth considering. Another method can be to change the business model and offer a rental of plant & equipment first, for clients who are not sure they will get good use out of a product.
Maximise your profitability
So once you have got the customers, you want to make as much money from them as you can, for as long as reasonable. Right? This translates to:
Seek Annuity Income – Wouldn’t it be better if one sale led to months or years of revenue, rather than a couple of milestone payments then you’re done? Annuity income means getting ongoing regular payments from just one sale. It can come from a business model that charges a regular fee, such as rentals, subscriptions and licensing. It can come from selling consumables such as printer ink. It can come from selling consumable products or bigger items with built in obsolescence such as smart phones. It can come from selling product extensions such further musical albums. It can be supported by supply contracts and automatic resupply.
Lower Costs – Profitability increases as you lower your costs. Review your value chain and eliminate waste. Automate the routine as much as you can. Substitute cheaper resources whenever possible. It could mean having a graduate trainee program, it could mean FAQs and technical manuals written and published online, it could mean investing in systems to support your customers!
Higher Prices – Don’t leave money on the table, use research to understand how your customers value your solutions! Understand how they will pay a premium for a better solution! Jon Manning, the pricing expert behind Pricing Prophets once said to me, “best practice is always having some price experiments going on”.
Automate the Cycle – once you have sold to a customer, you don’t want to put a decision in front of them every month to continue buying. Automate the delivery, invoicing and payments wherever you can!
High Barriers to Exit
When you have a profitable customer, you don’t want to lose them as new customers are much more expensive to acquire.
A Better Customer Solution & Experience – generates more loyal customers than a loyalty program marketing comes up with. A cancelled flight is far more damaging than expired frequent flyer points, and I don’t care that Telstra is more expensive, if you want to check your email in regional Australia, they’re the only choice. Beware unethical behaviour, it appears lucrative in the short term, but will cost you in the long run.
Requires a Loss to Exit – Nobody wants to lose their email address which traditionally keeps most people with their ISP, long after they start to think about leaving. If you live in the Apple ecosystem, you don’t want to lose all your apps (covers, in car holders, chargers etc) when you move to Android, and vice a versa.
Requires Effort to Exit – Nobody wants to lose their mobile phone number when changing phone companies, which is why the Government had to force number portability onto Optus, Telstra etc. But despite it being a reasonably easy process, the Telco’s will still make you jump through alot of hoops to exit. It’s a pain, and its deliberate. However it’s nowhere near as painful as changing Banks!
Requires Penalties to Exit – Minimum contract lengths and exit penalties have found their way into an enormous number of industries, despite having no relationship to the underlying costs that customer churn causes. If you are renting anything or subscribing for access to a service, expect to be locked in with alot of pain if you try to break the contract. See Smartphone and ISP contracts!
So what would happen when you re-engineer your business for good revenues?
- Perhaps engineering businesses would see themselves as sellers of more lucrative maintenance contracts, with the initial design project just the gateway? The service teams would no longer be the poor cousins of the project teams!
- Perhaps expensive suit manufacturers, could package in drycleaning services to the monthly fee you pay for accessing their clothing line.
- Perhaps Pharmacies could help you reorder your drugs as you need them, rather than waiting for you to come in.
- Perhaps Real Estate Agents would provide services around building value in your house over the long term, rather than just appraising it and selling it.
And perhaps the business that you launch and grow, will become a valuable commodity. Looking at Dollar Shave Club again, their revenues per customer are valued at a massive 20x higher than a competitor selling the same product in a traditional way! Dollar Shave Club clearly has the “good revenues”.