This week and next week we are going to talk about the best known number on any of the Financial Statements and that is Revenue. To talk about Revenue, we will actually be exiting the Financial Statements to get to Revenue. At this point, you are going to point to my last 2 Wednesday articles that talk about Sarbanes-Oxley and Deferred Revenue. Most people don’t have to worry about the accounting for this and if you do, please seek the advice of professionals. It is complicated and there is an astounding amount of wiggle room in it.
But for most of us, Revenue is clear. It is the amount of money that pay you for your products and services. The real issue is the fact that Revenue is a Result of other operations within the business. Particularly in Sales. So, I want to look at those numbers and take a step backwards through them to the ways to be thinking about Revenue. After we are done with that, we will start looking at Expenses.
When you get a customer to buy, the most important information is how many transactions you require to make your Revenue Target. This relates to what is called your Average Selling Price (ASP). At this point, most business owners balk because each sale is unique. They don’t want to think in aggregate, but having an ASP is a very valuable piece of knowledge. This number drives that number of transactions required for your business. The number of transactions (let’s use a month as the basis for this discussion) creates a whole lot of significance around how you are organized. You can imagine that a business like a Grocery Store is built very differently than a Realtor. The value of each transaction is vastly different. And that is what causes changes that companies are built.
The other real difference that companies can make is in the average number of transaction per customer. You would think that this is not changeable for something like a Realtor. But even here, can the person sell Home Warranty Policies (as an example)? There are many creative ways to provide ancillary products and services for follow on business. Depending on how you look at this it could either lower your ASP (with a greatly increased number of transactions) or raise your ASP (with the same number of transactions. Either way, those type of add-ons help make a business profitable. The largest cost is in landing a customer (and we will get there next week). Once you have one, it is much easier to upsell the customer into additional products and services.
Back to the number of transactions for just a second. Think about the number of people in Sales and the time required to make a Sale. All of this dictates significant metrics around the value that each Sales Person needs to bring in and thus their quota. As I have posted about alignment in the past, this is a good way to make sure that what you are proposing for a quota structure makes sense.
So, there it is. Your number one Key Results Indicator (KRI) – Revenue.
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