Are you growing faster than your competitors? Have you started the year off blowing out your plan? If you answer yes, congrats, you have a good “problem” on your hands.
What CEO doesn’t want to grow even faster? It gets the Board off your back, helps with the comp plan, and ensures a good President’s Club trip. When you exceed the company number consistently it is tempting to rest easy and declare victory. But that temptation masks an opportunity that can be found in two core areas:
- Profitable Revenue: Not all revenue is profitable – further dissecting by segment, offering, region, etc. can lead to a better overall focus.
- Pricing Opportunities: Are you charging the optimal price for each of your offerings and bundling products to introduce value-based pricing.
We recently helped a firm which had 40% compounded annual revenue growth with nearly flat bottom-line growth. They brought us in to better understand their go-to-market strategy, looking deeper at a few elements, including pricing. Why were they growing so fast, but not seeing the bottom-line results? They were investing in in the business for future growth, which was great, but as we looked further into deals, they had product lines and segments that were not profitable. To further, as we shopped their competitors, they were vastly underpricing their competition for which they did not have a full appreciation of the magnitude of the money they were leaving on the table.
From our experience, we have found applying a core structure to evaluate the profitability of your revenue and pricing opportunities to be helpful. You can download our tool, Pricing Opportunity Evaluation Framework for Companies in High Growth Mode.
When Revenue Is NOT Profitable
Not all revenue leads to profit. There are times where it is wise to take on less profitable revenue in the interest of growing – gain wallet share, expand into new markets, expand offering set, and develop scale around product extensions. Equally, there are times to consider turning away less profitable revenue in pursuit of return on investment maximization.
Leading firms continue to make investments so-as to not be the next Blockbuster or even the short-lived growth leader of Redbox. The video industry has seen multiple disruptors in the last 20 years completely change the landscape of the industry leaders’ numerous times over. The incumbent leaders didn’t make the investments to stay out in front of disruptors and evolve with the changing client demands and technological innovations. Firms sequence out investments and temporarily less profitable investments to continue a healthy growth trajectory.
On the other side of that coin, there are firms that may not fully understand profitable internal breakouts (salespeople, offices, offerings) and external breakouts (segments, regions). There is a cost to breaking out the various dimensions and diminishing returns. At the very least, we have seen successful firms to find that middle ground and decision on the swell of information. Firms use a combination of variables to determine how resources are allocated. From a macro perspective, using projected and actual revenue growth as well as profitability to maximize the firm’s resource allocations. More micro, determine how to make tactical over/under allocations based on a combination of quantitative and qualitative variables.
In the pursuit of optimal profitable revenue, turn down good opportunities so you can focus on the great ones.
When Selling Becomes Too Easy
When selling becomes “too easy,” you may have a pricing problem. Not an issue where customers are leaving as you are expensive, rather they are flocking to whatever it is that you sell because you offer high value. Don’t confuse profit with value. The two are distinctly different.
Profit is a numbers game – what to charge vs. what does it cost you to operate – the net of these leading to what you make from operating your business. Many firms peg their pricing to a margin off of their costs. This can be a simplistic way to price, particularly in a mature industry where firms provide what consumers view as a commodity.
Value is more around a perception that someone feels. Its less around your cost. It comes into play in most cases when the perceived benefit is felt vs. touched. The opportunities to value price may last days, months, quarters or even years before others start to run the numbers and begin to look to take advantage over the differences in a customer’s willingness to pay vs. the cost to sell/serve. It’s important that firms leverage resources to understand buyer personas, market listening, etc. to take swift action to optimize results.
Additionally, we have found bundling offerings to achieve higher value-based pricing to be another technique to optimize your pricing power. If you find customers buy multiple items frequently, that is a simple indication where to find value. More innovative is to notice the opportunity before customers do and getting out in front of the demand. In Three Reasons Companies Struggle to Execute Value-Based Pricing Strategies, we looked into strategies and levers to take advantage of these opportunities.
For additional insights on how we are seeing firms effectively price, download the Strategic Pricing Framework Guide to discover how top companies think about their pricing – leveraging different pricing strategies, structures, and dimensions.
So What… Now What…
Where might you go from here to come to a healthy spend balance, focused on the right investments? To re-iterate a few themes:
- Understand the numbers – buildout your infrastructure to dimension across sales and cost allocation.
- Understand your customer buying patterns – review how they buy and how they view your offerings.
- Be inquisitive – monitor your competitors but equally look for disruptors to your industry.
- Synthesize inputs – look for themes, movements, and future insights.
- Act on the feedback – take action, doing nothing is a decision in and of itself.
- Monitor/measure results – allocate time to define success and measure progress.
- Iterate – continue to re-assess on a monthly or quarterly basis to vet your assumptions.