Six Strategies for Managing Revenue Risk
When you boil off the ancillary stuff that business developers do, four distinct objects remain:
1. Capture: Acquire new customers
2. Maintain: Keep current customers happy
3. Grow: Encourage customers to increase spending with your company
4. Reclaim: Win back former customers
No mere coincidence that the word customer appears in each one. This indicates the basic element has been revealed. Time to stop boiling.
The problem is that the slew of activities involved in augmenting the Income Statement’s top line have obscured these fundamental objectives. For revenue generation, organizations now employ specialists for direct selling, indirect selling, measuring, forecasting, dashboarding, best-practicing, comparing, spreadsheeting, analyzing, planning, content developing, press releasing, training, storytelling, elevator pitching, and social-media-ing! How did this happen? Discuss . . .
Driven to distraction. “The sales models for many large companies have become more complex and less efficient, putting pressure on profit margins,” a Bain & Company survey explained. Using financial data between 2003 and 2011, Bain compared the income statements of about 200 US healthcare, technology, and financial services companies. “More than half of these companies had increasing sales and marketing expenses as a percentage of revenues over the period, or they failed to demonstrate the scale benefits that one would expect from their growing size.”
Sales pundits offer a reason for this by proclaiming that customers have suddenly become “more demanding than ever.” That’s an illusion designed to induce panic, sell services, or both. Customers are not more demanding. They have demands that are new and different, which throws vendors for a loop. Bain attributed the increased cost percentage to four emerging buying trends:
1. Customer needs becoming more sophisticated, evidenced by faster revenue growth in vertical industry solutions over general enterprise systems.
2. Customers defining value as derived from outcomes or results, rather than in simply receiving the lowest price.
3. Customers becoming more experienced conducting disciplined, competitive bid processes.
4. Customers becoming more wary about risks of incurring high switching costs.
These trends complicate almost every activity between trading partners. More intricate, collaborative processes for buyers drive congruent challenges for sellers. And for both, increased transaction costs, and greater risks. For B2B vendors, longer sales cycles and less predictable outcomes have become the new normal. Not everyone is upset. These problems represent red, billable meat for strategy consulting companies, which predictably promise “solutions” by positing new, box-intensive revenue frameworks.
Here’s one from PwC: The Sales, Channels & Distribution Diagnostics Framework. Despite the impenetrable title, multiple layers, lots of arrows pointing left-to-right and top-to-bottom, and odd categories under the Sales Technology Solutions stack (CRM Solutions/ Sales Portals/ Channel Integration Solutions/ MIS/ Sales Dashboards), it’s a useful visualization that takes a spaghetti bowl of cross-departmental projects, and organizes them into a concise, linear arrangement.
It’s easy to believe that adopting a more complex selling framework offers salvation from revenue calamity. But without knowing a company’s current situation, it’s hard to know whether that’s true. Regardless which selling model or framework your company uses or chooses to implement, expect to encounter a unique collection of risks. Some familiar, some brand-spanking new. For mitigation, consider one or more of these risk strategies:
1. Accept. Many executives regard risk as something to get rid of. But every business strategy involves risk acceptance. The challenge is knowing which are appropriate. For example, any company unable to accept the risk that a sales opportunity might fail is not market-ready. So for commercial organizations, the possibility of losing a deal is an appropriate risk to accept. From there, the question becomes how much capacity the company has for failed opportunities.
Examples of risk acceptance:
• “We expect that [X%] of our pipeline leads will not result in a sale.”
• “We’re going to monitor trends X, Y, and Z. But for now, we’re not mitigating their risks.”
• “We have budgeted [X%] of gross sales for Bad Debt Allowance.”
2. Reduce. This is the most common approach to revenue risk. After all, when it comes to risk, shouldn’t less be better? Maybe. Yet, some companies want the very risks that other companies willingly chuck over the fence. In fact, entire companies have been built on this idea. Who can’t think of an entrepreneur or two that has created a business by providing an effective solution for the difficult or hard-to-serve customer?
Examples of risk reduction:
• “We are tightening our lead-scoring requirements before handing opportunities to Sales.”
• “We are increasing our sales pipeline multiplier.”
• “We are conducting background checks on all of our new hires.”
3. Eliminate. Some risks can be so catastrophic – bad ethics, for example – that they exceed a company’s capacity to bear them. But eliminating a risk is rare, because it means crushing it to zero probability. When getting rid of a risk is the objective, often the best that can be achieved is making it a very, very low possibility.
Examples of risk elimination:
• “No orders will be shipped without payments clearing in advance.”
• “Moving forward, we’re discontinuing all channel sales and adopting a direct model.”
• “Our CRM system will not advance an opportunity to the next stage until we know [X.]”
4. Share. Some risks are too great for a single company to sustain, but they can become feasible when shared between two or more entities. This often occurs with co-development agreements between trading partners, or when projects are underwritten by other investors. Risk sharing occurs on the operational level, too. When a company cannot afford a salaried sales rep in a territory, the arrangement might become possible when base pay is lowered, and commission percentages are increased.
Examples of risk sharing:
• “We are engineering this new energy technology with a consortium of trading partners who will have exclusive rights if we are successful.”
• “Our reseller contract provides protected territories to our exclusive channel partners.”
• “Our suppliers have revenue incentives if we meet our target sales volumes.”
5. Transfer. This strategy is increasing, because companies have discovered rapid growth is possible through operating with few employees and scant physical assets. New business models are emerging where risks have been offloaded, and shifted to different entities in the value chain. Recently, one – AirBnB – has even become profitable!
Examples of risk transfer:
• “We are outsourcing our software development to a third-party company.”
• “Sales quotas are going up.”
• “All of our sales representatives are independent and work on full commission.”
6. Pool. As the name suggests, risk pooling is used for combining a large amount of similar risks into a single group. The rationale for risk pooling is that positive and negative spikes in variability tend to offset one another, thereby diminishing the impact, and lowering costs. Risk pooling is often used in supply chain applications where central warehouses might be used to consolidate inventories from satellite facilities, decreasing the investment in safety stock.
Examples of risk pooling:
• “We’re providing our reps a team incentive bonus if the territory meets its revenue target.”
• “Our strategy is to provide a horizontal software solution.”
• “To make quota, every rep must maintain no fewer than [X] qualified opportunities at any time.”
“The purpose of business is to create a customer,” Peter Drucker said. In a complex world, I find the simplicity refreshing. But all around Drucker’s straightforward idea swirls a constellation of risks. Don’t ignore them. Accept the right ones, and use this arsenal of choices for dealing with those that are consequential.