The 6 Paths to Revenue Growth

This is a 7-minute read, but it’s worth it!

Most of today’s companies execute multiple methods of bringing their product to market and creating revenues.  In this post, I’ll describe the nature of those paths to revenue and the pros and cons of each.

Of course, you might be interested to know which path to revenue is best for your business and my answer will be it depends on multiple factors that are unique to your business.  In reading thoughts you’ll get a sense of my opinion, but I’ll highlight most of the key considerations at the end of this post.

Direct Sales

This approach to the market requires the creation and management of a team that interacts directly with end user customers.  As such, all elements of Revenue Operations (“RO”) are required to be running in order to achieve optimal results. That being said, the sequence of RO levers to implement can vary depending on stage of company, availability of capital and product-market fit.

The direct sales approach can achieve faster results than other revenue channels but this is entirely dependent on your team and the ability of RO to identify the key pain points of each Ideal Client Profile and have an offering to fix these problems at a price that would be easily accepted.  Most of the time though, all of these elements are unknown (ICP, ICP Pain, Offering, Pricing) and thus the speed to fully ramped revenue growth can take significant time.

This approach is best for young companies who have launched their first or second product, and are seeking market feedback on the goodness of fit to their Ideal Client Profiles.

Pros:

  1. Fastest way to achieve market feedback
  2. Capture all economic rents from transactions (ie. No middlemen)
  3. Direct feedback provides ability of product team to iterate product, leading to (theoretically) faster product-market fit
  4. Ability to test business and go to market models and markets

Cons:

  1. This method is a big flywheel that requires a lot of heavy lifting, continuous review and complete alignment of the entire organization
  2. Ramp up time to fully scaled Revenue run rate is dependent on:
    1. Product-market fit
    2. Right approach to market
    3. Sales personnel & management skills, aptitudes and compensation model
  3. Requires the key elements of RO in order to have a chance to be effective.

Channel Partner or Affiliate Sales

There are many companies operating in local markets that already service your Ideal Clients and Prospects. They generally provide services and products similar or complimentary to your offering.

Generally these partners have both the relationship access to your target prospects and the technical skills to provide local service.  And if they’ve got great internal sales processes they can provide you with significant market penetration, presence and leverage.  If your offering requires local presence (due to language, culture or product complexity) then using channel or affiliate partners may be the easiest way for you to gain access to these markets.

Pros:

  1. Quicker access to Enterprise or Complex buyers
  2. Existing technical expertise shortens technical ramp up
  3. Low capital costs or expenditures
  4. Leverage affect possible

Cons:

  1. No direct access to prospects and customers hampers ability to confirm product-market fit
  2. To create real leverage, you need to occupy the mindshare of the partner
  3. Requires same enablement and training programs and “in-house” sales personnel
  4. Won’t know if the partner or affiliate is serious about marketing your offer until many months after execution of the relationship

Private or White Label Agreements

A private label agreement is one in which you agree to provide your product to an independent third-party with some minor modifications.  These modifications are generally related to branding and/or packaging, but could also include something materially different from your existing product including code or physical modifications.  In most cases, you’re still producing the modified product in your production facility or with your development team.

Most private label arrangements are governed by a legal agreement which covers a variety of matters including, but not limited to, joint marketing efforts (who pays for what), minimum sales commitments, progress payments for modifications (NREs), Intellectual Property protections, cancellation terms, and service & support programs.

One of the key differences between private label and other indirect revenue channels is that because product owners maintain control of the production, it’s easier for them to maintain control of the IP.

Pros:

  1. Access to potentially larger market without implications to existing brand
  2. Large volume commitments from the private label partner
  3. As a secondary revenue channel, these agreements create incremental revenue and gross margin
  4. With this offering you can attract complimentary market leaders and operators
  5. One of the lowest sales and marketing costs of revenue channel options

Cons:

  1. Requires its own channel management strategy and tactics within your organization
  2. With no direct access to end user market, you gain less information about product-market fit
  3. In most cases, there is little intertemporal accountability on sales volumes beyond contractual commitments
  4. Market confusion can be created if the private label product looks similar to your branded product
  5. If you have too many agreements outstanding your offering can become commoditized

Original Equipment Manufacturers (OEM)

Imagine that a large, multi-national Fortune 1,000 company with well-established revenue channels wants to purchase some component of your offering for its own products.  No muss, no fuss, just sell them the code, API or components and they’ll just write cheques.  Sounds easy, no?  Not exactly.

While the OEM client is the holy grail of revenue for technology focused companies, OEM deals are filled with trapdoors and intricacies that need to be navigated in order for them to be effective.

In addition to the IP protections that are required (most OEMs have their own R&D groups so workaround language is important), you’ll need to ensure that your new client doesn’t use competitive products in their end user solution (which could replace yours), engage in predatory purchasing policies to drive away your margins or request abnormal co-marketing support dollars in relation to the total “whole product”.

You’ll also need to ensure that the term of the agreement is of sufficient length so that you can reap some economies from the initial work that you’re going to be doing to comply with your OEM client’s product specifications (each deal is unique).  You’ll also need to watch out for “easy” termination clauses that would allow your OEM partner to cancel the agreement without implications.

Pros:

  1. Your components are embedded with a market leader driving increased component unit sales
  2. Increased component sales volume can result in gross margin improvement as your Bill of Materials or cost of development per unit decreases (ie. You benefit from economies of scale)
  3. Allows you to focus on technology more than the go to market strategy and other revenue channels

Cons:

  1. OEM agreements can take a long time to execute (think years, not months)
  2. Depending on market, ramp up time to revenues can also be longer than expected (and you’re not in control of this)
  3. Zero control over the go to market strategy or end user visibility
  4. Your component or offering may be considered a commodity by the OEM and thus marginalized as the OEM’s strategy changes
  5. Price becomes a major factor in negotiations as the OEM attempts to keep their whole product BOM within a target range

Licensing Agreements

A licensing transaction is when a third-party agrees to purchase the rights to use your IP for their own purpose.  In most cases, buyers who choose a licensing agreement (“licensees”), build and produce the end product or component as part of their “whole product” offering.

While OEM agreements are the “holy grail” for those manufacturing product, licensing agreements are the rocket fuel that can drive and monetize Research and Development efforts if you don’t have a go to market strategy as described above.  These deals can be complex but lucrative, and share some of the components with their OEM counterparts.

Pros:

  1. Highest gross margin revenue
  2. Can create high lifetime value per end-user
  3. Based on historical R&D performance

Cons:

  1. Trust but verify – you’ll need to have appropriate audit rights to ensure that you know your IP is being used and sold
  2. Agreements need to have strong workaround language or need to be able to evolve as technology changes
  3. Agreements can take a long time to execute
  4. The number of licensees is limited to those for whom your technology has strategic importance
  5. As the number of licensees increase, this Revenue Channel will require its own manager

Joint Ventures or Revenue Sharing Agreements

These relationships require careful thought and planning as they are generally designed to be long term in nature.

Joint Ventures are generally separate legal entities incorporated in the location where the business is to take place with their own (local) corporate governance guidelines.  In contrast, Revenue Sharing arrangements are not separate legal entities but a contractual agreement between two or more parties.

The nature of each agreement is customized for their respective market but you’ll need to agree on, at least, who covers what expenses, current and future product offerings, what type and how much technical support will be provided, product transfer pricing and legal liabilities.

Joint ventures are often created when the parties are bringing a new product or technology to a new market.  Revenue Sharing agreements are usually created when there is a decent product market fit in the primary market, but the operator is seeking to expand beyond is current target market or geographic borders and doesn’t want to commit its current go to market resources to this new target market.

While both strategies have an element of reduced execution risk because there is at least an additional invested party in making the business work appropriately, don’t be fooled.  If you want to make this arrangement successful then you’ll need to work as hard or more than any other revenue channel.  This seems counterintuitive because, while your partner is “invested” in this relationship (monetarily or otherwise), they’re not going to be as emotionally invested as you.

Pros:

  1. Startup funds shared between partners reduces financial risk
  2. Local presence in market assists end-users and legal requirements (local “tenders”)
  3. Creates a legal buffer between parent company and the operating entity, thereby reducing legal liability

Cons:

  1. Requires significant investment in personnel, training and support at the outset of the relationship
  2. Senior leadership must be part of the governance, decision making and audit process as part of its daily operations taking away focus on core operations
  3. Vetting and review process – as you’re gearing up for a long term relationship, make sure you know your partners and any challenges they might have
  4. Increased administrative costs – as JVs are separate legal entities they’ll have some of their own latent administrative costs

So Which Revenue Path is Right for You?

After reading this lengthy discussion you might be left with asking this question.  My answer is that it depends on several factors including:

  1. Product & business model maturity
  2. Capabilities of your team
  3. Desire to approach new markets (industries or geographies)
  4. Current financial situation
  5. Scope and size of addressable market

Bringing it all together

Because any dollar of revenue is a worthwhile pursuit, it’s easy to understand why you’d want to concurrently pursue all paths to Revenue as you’re launching (or relaunching) your business.  As you’ve come to appreciate from the above analysis, this simply isn’t true.

The initial and ongoing effort required to achieve your first dollar on any of these Revenue channels varies and is dependent on a number of factors including your current product-market fit, your internal team’s capabilities to manage the Revenue Channel and your current financial situation.

I’ll address each of these in a separate post in the near future, stay tuned.

Blair Carey is passionate about using data to help companies meet their mission and purpose which is why he created Insidecro.com as a place where CROs can collaborate on anything they’re thinking about.

You can find him on his LinkedIn profile here.

It’s time to get serious about Revenue Operations

This is a 5 minute read.

Recently, I’ve seen a few articles, whitepapers and blog posts about the nature of Revenue Operations and the newly created executive role called the ‘Chief Revenue Officer’ or CRO.

I’m writing post to describe the framework from which I view the future of this emerging business unit. I intended to dig deep into my thoughts and research on the matter and will be sharing them with you over the next few months in the form of a weekly post.

While the role appears to be “new” it is in fact a mash-up of a bunch of functional responsibilities within organizations over the last two generations. That being said, the availability of sales, marketing, customer success and accounting data that, when combined, create an entire picture of an organization’s revenue cycle is completely new.

Revenue Operations. Really?

Despite what we read every day about successful capital raises, acquisitions or exits by start-up companies, Revenues are the life blood of the organization.  If companies cannot turn their ideas into revenues (that hit their bank account), then they’ll eventually die a slow, painful and ugly death.  The deal sheets and databases are littered with the carcasses of dead startups that were successful in achieve product market-fit, but failed to convert this to an ongoing business case.

In most corporations, traditional business functions (Marketing, Sales, HR, Accounting) are slotted into separate department Silos.  Inter-departmental communication only occurs between the most senior of the corporate leadership and it becomes the CEO’s role to align these functional teams around a common mission and purpose.

In reality, most CEOs spend most of their time fighting fires or attempting to mitigate internal and external matters and have little time to align their functional departments (which could be one or two people). So the coordinating job never really gets done.

In my view, any function that touches revenue is part of the Revenue Operations attack.

The Revenue Levers for any enterprise are found in Marketing, Sales, Customer Service/Success, and Accounting.  Each is, in some way or form, responsible for Revenue being converted into bank deposits.  To drive Revenue, your team needs to apply focus to the salient tasks, jobs and processes in each of these four levers.

This is a dramatically different thinking from the Sales-heavy method that has been predominant in the previous decades.  A company doesn’t need to just hire a “Rockstar” VP of Sales to drive revenue or a killer marketing campaign; they need a team of specialists with a highly skilled leader to focus on driving sustainable revenue.

Friction exists without a Revenue Operations Conductor

The existence of friction in any part of your business slows the ability to convert prospects and opportunities into deposits in your bank account.  I call the speed at which a prospective client converts into cash Revenue Velocity and the rate of change in speed Revenue Acceleration (I’ll discuss each in more detail in a future post).

In some cases, friction provides for checks and balance.  But from my experience, friction is created when you haven’t fully formulated what is required to make it easy for prospects to do business with you.

In today’s multi-channel, multi-media business environment, your prospects and customers are bombarded by messaging to entice them to allocate their budgets elsewhere, so if you make it hard to do business with your company (eg. friction), you can expect that someone who’s more been  frictionless  will be taking that customer’s budget from you (despite your hard work).

Processes, technology and people are the reason why friction continues to exist.  If you can’t convert new prospects into cash, you likely have misaligned processes, poor technology solutions or personnel challenges.

The purpose of a Revenue Operations team is to reduce the friction in your business and to increase Revenue Velocity and Acceleration.  So if you care about the amount and speed of which your bank account gets filled then you’ll care about Revenue Operations.

The Revenue Operations Business Levers

A lever is defined as “a rigid bar that pivots about one point and that is used to move an object at a second point by a force applied at a third” (dictionary.com).

For Revenue Operations, the levers that are used to influence and build Revenues are the following:

  1. Marketing Operations
  2. Sales Operations
  3. Customer Success and Service Operations

While these appear to be straightforward, I’ll spend much of the next few months developing each of these in later posts, but in order to introduce the topics, I’ll summarize each below.

Marketing Operations

These tools, processes and programs will accurately describe and position your market offering, attract prospective customers to inquire and complete a purchase.  In general, marketing operations include market strategy and business analysis, demand generation, and message/brand management.

In describing your go to market strategy as warfare, marketing operations does the work that takes place before going to the market (Strategic battle preparations) and then iterates while you’re in the firefight (Tactical battle preparations).

Functionally, you’ll find brand and market analysts, graphic and web designers, strategists, writers and product specialists that will support Sales Operations.

Sales Operations

These tools, process and programs are used by your frontline team that interface directly with prospective customers.  This includes playbooks, scripts, cadences, dashboards and methods that your sales team will use in order to find, educate and convert prospects into first time customers.

Functionally, you’ll have business analysts, researchers, sales development reps, account executives, key account executives and data scientists in your Sales Operations team.

Customer Success and Service Operations

These are the tools, processes and programs that are used by your team with your new and existing customers.  Customer Success and Service relates directly to creating sustainable revenue.  Moreover, as the majority of the Customer Acquisition Costs are borne by the initial acquisition, the Customer Success team has the ability to create the most profitable Revenues in your Revenue Mix.  As such, the functional focus of these operations are on customer enablement, satisfaction and retention.

Functionally, you’ll have inside Customer Service Reps, Technical leaders, Onboarding Trainers and Product Support team members in your Customer Success team.

Data Drives Revenue Operations

During my time as an active investor in companies, I often heard that from the founders that they intended to hire a “Rockstar” VP of Sales to kickstart their nw market sales efforts.  Often these statements were met with skepticism because our investment committee felt that the hiring of one individual would not be the catalyst to launch an entire enterprise forward.  Rather it was a series of hires and execution of a business plan that would likely move the mountain.

The primary difference between how sales, marketing and customer service were run a decade ago and today is the availability of data.

In the same way that the marketing leader can determine which marketing campaigns are the most impact in developing business, today’s sales leader can pull statistical data from their Customer Relationship Management (“CRM”) or sales enablement system and easily understand the challenges that the sales team is having in their sales process.  Thus the prevalence of data creates a mosaic of insight that allows thoughtful and caring executives to move the business forward.

Unfortunately this abundance of data has left some leaders unclear of their focus.  It seems to me that the main challenge amongst today’s Sales, Marketing and Success leaders is that they are either measuring the wrong metrics or don’t know which measurements are meaningful to driving their revenues so they’re measuring everything.  Thus this ocean of data has created situation where leaders are drowning and they don’t even know how to catch the life preserver.

One way to ensure that data becomes a servant to the leader is to use a systematic approach.  For many, the scientific method of creating hypotheses, developing and executing tests for these hypotheses provides comfort to manage the reams of data that result from standard operations.  For others, the scientific approach seems cold and unkind and is inconsiderate of the human relations and reactions involved in a real person to person activity like sales.

Who will coordinate all of these efforts and manage this data?: the CRO

Today’s Chief Revenue Officer is more than just the Rockstar salesperson who closes big deals and inspires other to do the same.  Today’s CRO understands how to use data to advance the company’s interests via a coordinated attack from Sales, Marketing and Customer Success Operations.  The CRO is the master strategist who launches the campaigns and battle plans to drive the Revenue Attack.

In addition, the CRO is the internal leader who relentlessly reduces organization friction.  As a result, the CRO makes it easy for prospects to work with and buy from their organization at every step in the customer acquisition and success process.

In smaller companies (less than 30 employees), the CEO acts as the CRO, but as the business grows in either complexity or scope, someone must be tasked with the role of coordinating the go to market attack.

Today’s CRO

A quick search on LinkedIn Sales Navigator for the terms CRO or Chief Revenue Officer results in 17,996 names.  Drill down a bit by selecting for companies with more than 50 employees and seniority (Director, VP, CXO) and you find that throughout the globe there are 3,566 names.

What do most of these senior CROs have in common?  They’ve been in their role for less than 5 years (most less than 2 years) and that they’ve acquired experience in all forms of sales transactions and teams (SMB, Enterprise, Licensing, etc.) and they’ve got an analytical background (either Engineering, Economics or Finance).

Why is this?

As a CRO you need a combination of the social sciences of psychology and behavioural economics and the deep analytical framework to appreciate the power of data.  They are essentially a “people-person” who loves to spend time looking at puzzles in  numbers and figuring out what’s really going on.

In summary

There’s a lot to unpack here and I intend to do so over the ensuing few months.  I hope that you’ll join me on the journey through your comments, please follow me here and you’ll get all of my latest thoughts and ideas.

Blair Carey is passionate about using data to help companies meet their mission and purpose. He is the creator the new site insidecro.com where CROs can collaborate on anything they’re thinking about.  You can follow him here or find him on his LinkedIn profile here.

Inside CRO Begins

 

After having spent many years investing in private companies and working with them to revamp and revitalize their businesses, it became clear to me that there needs to be a place to discuss issues relating to growing Revenues.

Inside CRO is that place.

It’s my Mission and Purpose at Inside CRO to help young (and not so young) companies embrace the multi-channel revenue universe and all that is required to do so.  In doing so, I’ll be sharing my experiences as well as others.

Welcome.