It probably sounds like heresy to talk about “Good Revenue” and “Bad Revenue,” particularly when you’re struggling to make your numbers and everything seems good. But that’s just the point, understanding what “Good Revenue” is, focusing on finding it, minimizing our time chasing “Bad Revenue” makes achieving the numbers much easier!
Now that I’ve thoroughly confused you, let me try to drive some clarity into the idea.
Good revenue not only provides you the cash you get from the specific deal, but position you to build upon that base, creating more revenue, more easily. That may come through follow on sales in the account, because we’ve created a very happy customer, but the more important impact is what it does for us in building our credibility, visibility, knowledge, and experience base in a new segment.
Let’s imagine we’re a brand new company launching new product. Our initial sales are very difficult. We struggle to create visibility, awareness and interest. Once we’ve found a customer, we have a challenging and long sales cycle. We have to demonstrate our knowledge and experience in the market and in solving similar problems—kind of tough when you are brand new. Additionally, regardless how well we have researched, we’re really learning on that first sale. We’re trying to understand the customer problems and how we really address those problems, we’re trying to figure out the sales process–who needs to be involved, key activities, triggers, competition, the buying cycle, all the things critical to closing a deal. So those first deals are tough, they take a long time, and demand a lot of attention from everyone in the organization. But we’ve been successful and closed the deal—we may have had to discount a little to get it, but we’ve closed it.
Now let’s think about the next sale into that segment. We already have the experience of that first sale under our belt. We understand a little more about what the sales process should be–thought it’s not perfect. We know a little more about the things we need to do to win, based on our experience with the first sale. We have “experience” in the segment–so we may be more conversant on issues, we may even be able to reference the first customer to add greater credibility. So the second sale is a little easier–it may take a little less time and resource, we may have not have to discount as much because we understand our value and can defend it better.
Then as we get our third, fourth, tenth, hundredth sales into that segment, our ability, our experience, grows. Through our increased experience, we are much more credible when we engage customers in the segment. We know how to best align our sales process with their buying process, our win rates increase, our sales cycles decrease, our margins, perhaps our average deal value increases. We start to develop a reputation in the segment, when we prospect, customers have heard of us, they know we are credible and can produce results, they are more willing to consider us as a solution provider. Customers are even approaching us, we aren’t having to find them, they know what we’ve done for others in the industry/segment, so they come to us.
By focusing our efforts within our sweet spot, we actually accelerate our ability to grow. Each deal enables us to more effectively and efficiently pursue other deals. This is “Good Revenue.” We not only get the income from the deal, but it builds our capabilities and experience to go after more, more easily/effectively.
By contrast, “Bad Revenue” is like reliving that first sale for every deal. Each deal is new, we have no experience—they are tough because our competitors are more established, they know how to get deals done, plus the customers know them. Each deal is so different, so it’s very difficult to build our experience base. Our win rates are, naturally, much lower. Our sales cycles are much longer. We have to invest more resource to win each deal, so the cost of selling (customer acquisition) is high–higher than our competition. Then to win these deals, we proably have to do all sorts of unnatural acts–particularly around pricing.
Imagine every deal being like this! It’s impossible to grow, we’re constantly starting from scratch.
Here’s the most counterintuitive part of all this. As sales people struggle to make their numbers, they tend to cast a wider net—reducing qualification criteria, chasing opportunities further outside our sweet spots. The more the sales person struggles, the further they look. What’s happening is they are actually doing the wrong thing, they are reducing their ability to win and make their numbers. Their win rates plummet, sales cycles increase, they struggle—so then they cast yet wider net—and the death spiral continues.
There are times when we choose to chase “Bad Revenue.” For example, if we are trying to expand our sweet spot, penetrate a new segment, we purposely go after customers far out side our sweet spot. But we do so knowing we will have to build our experience, credibility, and so forth–so we can get our first success, then start building on that, chasing Good Revenue in the new segment (the smart way is Geoffrey Moore’s bowling alley approach).
Individually and organizationally, if we want to maximize our growth and success, it’s critical to understand the difference between Good Revenue and Bad Revenue. We have to identify and focus on our sweet spots–consciously focusing on Good Revenue opportunities and not getting diverted by Bad Revenue opportunities. When times get tough and we are struggling, we have to narrow our focus and increase the intensity of chasing Good Revenue. We have to resist the tendency to chase every deal.
Do you understand the characteristics of your Good Revenue deals?
This is a really profound issue. The labels ‘Good’ and ‘Bad’ hardly do credit to the depth of the concept that Dave raises.
Sales, and Salespeople, do not operate in a bubble.
Yet, the ‘bad’ revenue will be ascribed to a ‘Sales’,
and more likely to a ‘Salesperson’, their error of judgement.
Bad revenue is a symptom of profound problems in the whole firm! Chasing the wrong prospects is both a leadership and a management issue. It’s a Sales and marketing issue.
Like many Business ‘problems’ it can be overcome by “focus”.
Sales focus, Marketing focus, Leadership focus, and especially Management focus.
If we cannot control what we sell, and to whom we sell it, then we have a profound Business problem.
Great point Brian, this really is a leadership issue. Too often, sales people are pushed into chasing bad revenue, or managers aren’t paying enough attention to correct sales people who unwittingly get off course.