Copyright Atomic Dog Publishing, 2006


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Copyright Atomic Dog Publishing, 2006

  1. 1. Chapter 5 Revenue Strategy
  2. 2. 5-1 Introduction <ul><li>Revenue provides the fuel for the entrepreneurial venture’s growth. </li></ul><ul><ul><li>Entrepreneurs general understanding of how each component of the business contributes to revenue — revenue strategy. </li></ul></ul><ul><ul><ul><li>Developing and executing a revenue strategy is about a venture’s products and services and about its target markets. </li></ul></ul></ul><ul><ul><ul><li>Revenue strategy is developed with input from various business activities, including marketing, sales, and customer service. </li></ul></ul></ul><ul><ul><ul><li>The venture must also develop credit and collections policies. </li></ul></ul></ul>
  3. 3. Exhibit 5-1 The Five Components of Revenue Strategy
  4. 4. 5-2 What Is Revenue Strategy? <ul><li>Providing a valuable product or service to customers is the primary means by which businesses produce revenue. </li></ul><ul><ul><li>The entrepreneur has three rules for success: </li></ul></ul><ul><ul><ul><li>Focus on the customer </li></ul></ul></ul><ul><ul><ul><li>Keep turnaround times short </li></ul></ul></ul><ul><ul><ul><li>Always give the customer what they want </li></ul></ul></ul><ul><ul><li>In most businesses, the CEO coordinates the interaction among marketing, sales, and customer service functions — functioning as the vice president of revenue. </li></ul></ul><ul><ul><ul><li>Functional divisions and the communication and execution gaps that develop among them, are some of the major challenges that large organizations face. </li></ul></ul></ul>
  5. 5. 5-2 What Is Revenue Strategy? (cont.) <ul><ul><ul><li>The entrepreneur must integrate the five components of revenue strategy into a coherent whole that focuses on delivering value to customers. </li></ul></ul></ul><ul><li>Most large companies tend to gauge their success in terms of quarterly profit increases. </li></ul><ul><ul><li>Most traditional companies focus on profit improvement more than revenue growth. </li></ul></ul><ul><ul><li>The entrepreneurial venture, most focus on revenue growth. </li></ul></ul><ul><ul><li>Revenue growth in entrepreneurial companies is achieved through an intense focus on customers. </li></ul></ul><ul><ul><li>Acquiring customers begins with the marketing message. </li></ul></ul>
  6. 6. Exhibit 5-2 Growth Curve and Investment Cycles
  7. 7. 5-2a Marketing <ul><li>Marketing varies widely, primarily because each venture must focus its marketing approach directly on its target customers and their buying habits. </li></ul><ul><ul><li>From the perspective of revenue strategy — develop sustainable competitive advantage (SCA). </li></ul></ul><ul><ul><ul><li>By studying what competitors are offering to the market and attacking that market with a differentiated offering. </li></ul></ul></ul><ul><ul><ul><li>Protecting an SCA in a number of ways — trademarks, copyrights, patents and trade secrets. </li></ul></ul></ul><ul><ul><ul><li>Defend an SCA by legal means, constantly improving and introducing new and complementary products, or by conducting ongoing market research and analysis. </li></ul></ul></ul><ul><ul><li>Another way that marketing contributes to revenue strategy is through analysis of consumer behavior and projections about future tastes and buying habits. </li></ul></ul>
  8. 8. Exhibit 5-3 How an SCA Provides Competitive Advantage
  9. 9. 5-2a Marketing (cont.) <ul><li>Knowing the company’s products and services and the factors that govern customer decision making — important requirements of successful marketing. </li></ul><ul><ul><li>The extent and amount of marketing conducted by a company — function of its budget. </li></ul></ul><ul><ul><ul><li>In the early phases of an entrepreneurial venture, marketing budgets are usually limited. To maximize revenue: </li></ul></ul></ul><ul><ul><ul><ul><li>Entrepreneurs target a market, develop a persuasive message and use communication channels that routinely reach the target market. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Entrepreneurs also leverage their contacts to generate low-cost marketing opportunities. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Entrepreneurs observe the competition closely. </li></ul></ul></ul></ul>
  10. 10. 5-2b Sales <ul><li>Selling is the business activity that is most directly related to a company’s revenue. </li></ul><ul><ul><li>Inside sales — employed by the venture. </li></ul></ul><ul><ul><ul><li>Salespeople can be an expensive investment. </li></ul></ul></ul><ul><ul><ul><li>Most salespeople prefer to earn through commissions. </li></ul></ul></ul><ul><ul><ul><ul><li>Commission structure is an important source of motivation or de-motivation to the sales force. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Sales compensation is complicated and must be fully integrated with the revenue strategy. </li></ul></ul></ul></ul><ul><ul><ul><li>Guidelines for entrepreneurs to follow: </li></ul></ul></ul><ul><ul><ul><ul><li>Remember sales compensation is for employees responsible for persuading the customer to act. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Realize that the company is going to change as it grows and compensation has to change as well. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Understand difference between sales compensation and total compensation. </li></ul></ul></ul></ul>
  11. 11. 5-2b Sales (cont.) <ul><ul><ul><li>The role of salespeople is an entrepreneurial venture is to adapt the marketing message to individual customer’s needs: </li></ul></ul></ul><ul><ul><ul><ul><li>Adaptive selling technique </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Personal selling technique </li></ul></ul></ul></ul><ul><ul><li>Outside Sales — not employed by the venture </li></ul></ul><ul><ul><ul><li>Direct Selling: Independent contractors who represent and sell products for one or more clients. </li></ul></ul></ul><ul><ul><ul><li>E-commerce: Enable customers to learn about the company’s products or services and to purchase them online. </li></ul></ul></ul><ul><ul><ul><li>Party plan selling: Simplified distribution channel — manufactured products are sold directly to customers. </li></ul></ul></ul><ul><ul><ul><li>Multilevel marketing (MLM): Network marketing — direct-selling process is duplicated by salespeople who sponsor and train others. </li></ul></ul></ul>
  12. 12. Exhibit 5-4 Number of Direct Salespeople in the United States Source: Direct Selling Association, Washington, DC. .
  13. 13. Exhibit 5-5 A Typical MLM System
  14. 14. 5-2b Sales (cont.) <ul><ul><li>Telemarketing: An effective sales tool that every entrepreneur should at least consider. </li></ul></ul><ul><ul><ul><li>Telemarketing in the United States has been set back — the institution of a national Do Not Call Registry. </li></ul></ul></ul><ul><ul><ul><li>However, intrepid telemarketers are engaging in other novel techniques such as calling cell phone numbers, which are not protected by the federal list. </li></ul></ul></ul>
  15. 15. 5-2c Customer Service <ul><li>Many inexperienced entrepreneurs think of customer service as a necessary evil. </li></ul><ul><ul><li>Because customer service is an after-sale expense, it constitutes non-revenue-generating overhead. </li></ul></ul><ul><ul><li>Although customer service is often an after-sale business function, it impacts revenue in two ways: </li></ul></ul><ul><ul><ul><li>Dissatisfied customers may elect to return their purchases — resulting in lost revenue. </li></ul></ul></ul><ul><ul><ul><li>Satisfied customers may tell others about their positive customer service experiences — resulting in new revenue for the venture. </li></ul></ul></ul>
  16. 16. 5-2c Customer Service (cont.) <ul><ul><li>Customer service strategies can become a source of competitive advantage for entrepreneurial ventures to determine a way to offer a service that competitors either don’t offer or don’t perform effectively. </li></ul></ul><ul><ul><li>Identify a challenging customer service problem in an industry and be the first business to find and offer an effective solution. </li></ul></ul><ul><ul><li>Emphasize pre-sale customer service as a means of acquiring paying customers. </li></ul></ul><ul><ul><li>Customer service can also produce revenue through the sale of warranties. </li></ul></ul><ul><ul><li>Customer service strategy includes the selection and implementation of appropriate technologies. </li></ul></ul><ul><ul><ul><li>Customer relationship management (CRM) software </li></ul></ul></ul>
  17. 17. 5-2d Credit and Collection Policies <ul><li>Venture must develop credit and collection policies, execute policies consistently to maximize revenue. </li></ul><ul><ul><li>Credit is based on the assumption that the customers will pay later, usually with an interest charge. </li></ul></ul><ul><ul><ul><li>The longer the customer has to pay back the loan and the lower the interest rate charged by the lender, the greater will be the effect on sales volume. </li></ul></ul></ul><ul><ul><ul><li>Increased sales volume is the primary objective of both the marketing and sales activities. </li></ul></ul></ul><ul><ul><ul><ul><li>If managers responsible for these activities determine the venture’s credit policy, the outcome is predictable — they would tend to keep interest rates low and payback terms long. </li></ul></ul></ul></ul>
  18. 18. 5-2d Credit and Collection Policies (cont.) <ul><ul><li>Granting credit without an established collection policy has ruined many businesses. </li></ul></ul><ul><ul><li>The company’s collection policy is the system used for collecting from customers who do not pay on time. </li></ul></ul><ul><ul><li>Accounts receivable refers to payments due from customers. </li></ul></ul><ul><ul><ul><li>A company with receivables is loaning its cash to customers instead of collecting it. </li></ul></ul></ul><ul><ul><ul><li>The average actual collection period is known as days receivable and can be calculated as follows: </li></ul></ul></ul><ul><ul><ul><ul><li>Days receivable = actual accounts receivable / sales per day </li></ul></ul></ul></ul>
  19. 19. 5-2d Credit and Collection Policies (cont.) <ul><ul><li>When days receivables is greater than the venture’s credit terms — age accounts receivable by multiples of the credit terms. </li></ul></ul><ul><ul><li>Entrepreneur needs understands the concept of days receivable and aging, and other aspects of collection. </li></ul></ul><ul><ul><ul><li>The longer an account goes unpaid, the more difficult it becomes to collect . </li></ul></ul></ul><ul><ul><ul><li>A pre-collect notice is sent by a collection agency to the debtor. </li></ul></ul></ul><ul><ul><ul><li>Collection agencies focus on collecting past due accounts for businesses. </li></ul></ul></ul><ul><ul><ul><ul><li>One law they must follow is the Fair Debt Collection Practices Act, or FDCPA. </li></ul></ul></ul></ul>
  20. 20. 5-2d Credit and Collection Policies (cont.) <ul><ul><li>A new venture may occasionally need to take action to motivate a customer to pay, but customer retention is always important. </li></ul></ul><ul><ul><ul><li>Retaining customers is important because it often costs a lot of money to acquire them. </li></ul></ul></ul><ul><ul><ul><li>Customer acquisition costs — the time, resources, and marketing collateral that are required to add a single customer to the firm’s customer list. </li></ul></ul></ul>
  21. 21. 5-2e Multiple Revenue Streams <ul><li>Developing multiple revenue streams is important for a growing venture and should be a part of the firm’s revenue strategy. </li></ul><ul><ul><li>Developing multiple revenue streams with customers has several advantages for entrepreneurial ventures. </li></ul></ul><ul><ul><ul><li>Customers purchase more goods or services from the venture, they increase their switching costs. </li></ul></ul></ul><ul><ul><ul><li>Increased sales per customer, leads to a higher return on the capital that was invested to acquire the customer in the first place. </li></ul></ul></ul><ul><ul><li>The effect of multiple revenue streams on the total revenues of a company is an important reason that single-product or single-service companies have a difficult time succeeding. </li></ul></ul>
  22. 22. 5-2e Multiple Revenue Streams (cont.) <ul><ul><li>Ventures can spin off new revenue streams into separate companies. </li></ul></ul><ul><ul><ul><li>Advantages of entrepreneurial ventures — adaptability and ability to pursue leads and opportunities quickly. </li></ul></ul></ul><ul><li>The multiple revenue stream approach is an important tool in revenue strategy because: </li></ul><ul><ul><li>It leverages the investment made in acquiring the customer in the first place. </li></ul></ul><ul><ul><li>It helps the entrepreneurial venture diversify its sources of income. </li></ul></ul>