Everyone Loves Revenues
Understand what drives revenues in a sustainable manner.
PRICE X QUANTITY = REVENUE
KEY Premise
Revenue is the primary driver of value in a company. Revenue is driven by selling quantities of goods or services at certain prices. Almost every concept studied in business school programs relate to the revenue.
We will look in detail what drives consistent revenues in a company and why revenue is called a 'vanity metric' when it comes to valuing a company.
People buy products and services because they help them achieve their goals. Their goals are achieved by getting the job done required.
Good products help people get the job done while catering to their needs, wants, desires, and capabilities. When people are able to achieve their goals with certain products they will come back and buy your product again when the need for job to be done arises. Thus, a product that helps get job done with convenience and without confusion is a product that gets bought on repeat basis and drives revenues of the firm.
A good product gets sold in large number of quantities and at good prices leading to upside movement of Price x Quantity equation which results into Revenues.
Thus, organisations that create products that let a large number of people get their jobs done and achieve their goals, perform better compared to organisations that create products that do not do so.
Everything else that we discuss below or touch upon later depend upon product for their long term viability. For example, a good marketing program cannot sell a bad product. May be it can sell the product once but it cannot do so repeatedly. A great product leads to decrease of marketing spends over a long period of time leads to better lifetime value of the customers.
When you have formulated a product or a service that can help people get their jobs done, you need to make people aware about your products and communicate value and information about how it can be helpful to people. Good marketing strategies help people connect to the product or service in some manner and helps them make decision about the purchases. But, a good marketing cannot sell a bad product. A good marketing brings people to buy a good product once and the quality and experience of people with the product brings them back. The idea is to create a self sustaining cycle that brings down the marketing costs over a long period of time. This helps in increasing the Life Time Value (LTV) of the customers. We will discuss LTV in detail.
Marketing comes in many forms and there is a cost involved making people aware of your offering, communicating value, helping them understand how your product helps them achieve their goals, and help them make their purchase decision.
Marketing comes in many forms. Advertisement, paying people talk about your product, communicating through digital channels, writing a good copy of your article, distribution store direction QR codes etc.
Let us align our thoughts before we move ahead. Pricing Strategies are not about price setting. It encompasses a lot of things in addition to price points. Pricing strategies cater to the economic and emotional value people put on the products. They are also about setting right perception positioning. Pricing strategies also help you sustain competitive advantage in challenging times. Pricing innovation become can help create multifold revenue increment in the business.
In our opinion, providing discounts on price points in not a pricing strategy. It is a tactic that sometimes helps generate short term results in terms of driving sales but can create a spiral where there may come a long term downturn.
Pricing strategies should be planned from long term perspective because they can become a firm's moat against their competitors.
How your product is distributed creates a large impact on firms revenues. Distribution of products so the right place at the right time helps put the products in a moment when probability of it being bought increases. Distribution is about opening up sales channels.
A wider distribution channels make products reach to a large number of people. We need to assess costs associated with each distribution channel and see how various costs linked to selling products or services shifts from one location on P&L to another.
For Example, suppose you sell an electronic product, may be a cellphone. You can choose your distribution channels as below.
You can sell directly from your website - in such as case you need to pay charges for storage spaces for the products that becomes your rental cost. You may also need to pay website design and maintenance cost, and salaries for handling individual shipments.
You can use Amazon as one of the distribution channels. In such a case all the work shifts to Amazon FBA. Your costs become more variable in nature because Amazon may charge you on the basis of per unit sold. Your requirement for maintaining the warehouse may decrease.
Production capacity design supports revenues by balancing the volume of product output with the demand of current and future. If firm's product is really good and there is a high demand, having adequate production capacity helps fulfil the demands and adds to the revenue. If production capacity does not meet the demand, people may switch to buying other products from the other firm because at the end they need to get their job done.
Operations management is all about driving efficiency. Business operations come in all aspects of business. Here we talk about operations that drive sales. Any operational activity that is closer to the end point of sale helps immensely in unlocking sales that may not have been done otherwise.
All the drivers of revenue comes with costs that sit somewhere on your P&L. Cost comes first and then helps in driving revenue.
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