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Not All Revenue Is “Good Revenue”

by David Brock on February 17th, 2020

You are probably reading this title thinking, “Dave has finally flipped out. We knew he was headed that direction, but he’s gone!”

Let me explain myself, revenue is important. But it’s important to look at the composition of that revenue to understand not only how it meets your current goals/objectives, but how it positions your organization/company for future growth.

Let’s dissect what good and bad revenue looks like:

First, it’s sales responsibility to execute the company strategy in the face of the customer. Stated differently, sales has to sell the entire product portfolio, not just their favorite products.

Let’s imagine a company that’s looking to grow. It introduces new product, services, perhaps goes after new markets. Gaining traction in those areas is important to the future growth plans. But if sales people continue to focus their favorite products to their favorite customers, they won’t be executing the company growth strategy—even if they are making their numbers. Those new product group or the growth initiatives will fail, the company will miss it’s strategic growth targets.

For example, let’s imagine a company that has two product lines, A and B. Let’s also manage two sales people. Sales person 1 has a quota of $10M, she makes it by selling a balance of products A and B. Sales person 2 has the same quota but makes it just by selling his favorite product, product line A.

Which sales person has done a better job? Many of you would say, “They both did great! They hit their goals of $10M each!”

But I would submit sales person 1 did a better job. She hit her goals with balanced performance of selling the entire company portfolio. I would, also, say that even though sales person 2 hit his goal, he underperformed the potential. Surely there were product line B possibilities in his territory, he just didn’t bother to chase them. In reality, had he looked for all the opportunity in his territory, he might have sold much more than $10M.

As we look at sales performance, we have to make sure the sales people are balancing their performance across the entire product line they have responsibility for selling. If they aren’t they aren’t maximizing the potential of their territory, or executing the strategy the company expects to be executed.

Let’s look at another more challenging issue. Let’s say our company has 80% of it’s revenue coming from an increasingly mature market. The market has passed it’s peak and is in decline. In this market, pricing becomes a challenge. As the company and it’s competitors are facing declining revenues, to win business, they will have to discount more and more. And, over time, the margins become unacceptable–even though you may be hitting your revenue goals.

Unless the company does something, it’s on a death spiral. It needs to find a way to shift to products/markets that drive growth. But too on, particularly if these products are the “family jewels,” they continue to invest in their slow death.

It takes an astute management team to recognize this, protecting as much of the base as they can, yet recognizing if they don’t make the shift to new offerings/markets, the company fails. It’s a delicate balancing act–there are lots of different tactics/strategies to do this. Sometimes in means consciously taking a short term revenue hit, to make the transition from bad revenue to good revenue.

Revenue is important, but we want to focus on revenue that enables us to continue to grow and expand–we want to focus on good revenue.

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4 Comments
  1. sacha raybaud permalink

    Hello Dave,

    One comment to say that most innovation gurus (starting at least with Peter Drucker in the 80s) do the following recommendation regarding the point you are raising: the new products planned to be sold to different customers than the current ones (i.e. what we can call “innovative” products) should be handled by a dedicated set of sales people. And not by the sales people also in charge of the current products.
    Because it’s too difficult to put in place a compensation plan that motivates them to equally sell both the current and the innovative products.

    Of course, this is only relevant in case of heterogeneity in the products’ portfolio. It works well to have several products in the portfolio managed by the same sales person providing there’s a minimum level of homogeneity (like the same type of customers and the same level of complexity).

    A final note to say that it’s not only a theoretical/academical view. It also matches my professional experience in the software industry!

    • Thanks for the comment Sacha, you make some good points, but my experience is different and it’s very difficult to have general observations without understanding the specific situation.

      1. In many cases, new products are focused on expanding share of current customers and markets. They may be very easily saleable by the current sales organization, with the proper training coaching. The reality is probably the majority of new products don’t fit the innovative category, but are expansion oriented.
      2. In some cases a temporary specialist overlay organization is needed to supplement/complement the capabilities of the account managers, that doesn’t relieve them of the responsibility of balanced performance within their accounts. Also, to the degree possible, those specialists, in addition to initial sales should also focus on knowledge transfer to the regular sales force.
      3. There are any number of non-compensation levers management can use to drive balance performance, not the least of which is the performance plan and performance expectations.
      4. If one needs to shift focus to the new product set, one might consider biasing comp to the new product set.
      5. As much as we may want to have a separate sales force addressing new markets, in too many cases, it’s just unaffordable, so we have to find new ways to address this.

      Again, I think it’s important to look at each situation in it’s context, adopting the best approach for the organization. Thanks for adding to the discussion.

      • sacha raybaud permalink

        I agree 100% that each situation should be looked at in its context to find the most suitable approach!
        Beyond the different possible options to put in place, I would say that it comes down to a matter of mindset in the sales team: think first about the interest of the company. And I must say that, unfortunately, it’s not what I’ve always seen when working with sales people!

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