I see companies chasing revenue all the time in their quest for growth. The problem is, you can’t take revenue to the bank, so if it’s not profitable revenue, you’re actually going in the wrong direction. One need look no further than the Fortune 500 for proof, as in any given year almost 1 in 6 is losing money… and the Fortune 500 celebrates firms with some of the largest revenue in the world. You’ll find local evidence too – find the Top 100 list for your geography. In any given year, approximately 40% of the companies who increased their revenues in a given year will have actually seen a drop in profits. That’s not progress, and it happens with the best of intentions. But there’s a better way.
1. It’s not how many customers you have, it’s how many of those customers are contributing margin.
A client of mine is trying to shift from a $50M company to a $500M company. An up-and-coming new VP of Sales signed up over 100 new dealers in his well-intentioned efforts to support this goal. They incurred all the usual costs – account setup and credit checks, training, providing samples, support, and so on. 18 months later, not one of those accounts had broken even. Most had sold absolutely nothing. This company had chased the wrong dealers, and hurt their bottom line as a result. They may as well simply have made a donation to those dealers’ businesses.
2. It’s not the size of the customer, it’s the size of the profit they deliver
This client also landed a “whale” client – a million dollars of revenue per year. What happened next is something I see all the time. As the world went into recession in 2008, this dealer became very aggressive in negotiating discounts, and my client agreed in order to maintain volumes required to keep all his staff employed. That’s not always a bad short-term strategy, especially when dealing with a limited market of skilled workers, but it becomes a problem when times change but the deal doesn’t. For years, my client served this dealer at almost zero margin, but it got worst. The dealer also negotiated aggressive payment terms of 60 days from delivery (which was about 60 days from the time my client started incurring production costs for materials and labor). Then, he took 90-120 days to pay. My client was essentially financing this fellow’s business at no cost, yet there was still a cost to him as he had to secure his own working capital from his bank, and it wasn’t free. Post-recession, the dealer would not accept new pricing or new terms, and eventually they had to part company. All of that time, money, and effort went right down the drain. The good news is that another $1M dealer in that territory was happy to sign on, and sells high-margin products. The opportunity cost was in not letting the other dealer go sooner, in favor of the more profitable dealer.
3. Not all revenue is good revenue, and you get what you incent.
Almost every organization I’ve ever worked with incents their sales team, their sales managers, and even senior executives based on revenue. A few who are more enlightened incent on the basis of gross margin or profit per job if their business lends itself to that, or implement profit sharing plans. Rewarding revenue at all costs is one of the most dangerous practices in your business, because it creates the wrong focus. Sure, its quick, its easy, and using revenue as a preliminary way of keeping score is not going to go away. However, I recommend to all of my clients that they use an overlay of Profit per Employee to evaluate whether they are going forward or going backwards. You can download a free benchmarking report that teaches you all about Profit per Employee or what I prefer to call Return on People, and see how it can help you set the bar higher AND drive the right behaviors. You’ll stop moving backwards and instead, create the profitable growth you’re really seeking.
Go ahead and download the Return on People Benchmark Report.