Are You Converting Customers Life-Time Value into Revenue?
What You Need to Know
Making sure your end-to-end revenue cycle is as efficient as possible and you are identifying the key components that lead to your customers life time value, isn’t an easy problem to tackle. At Voiant, we take difficult problems like this one and begin to break it down until there is a tangible solution with increased profitability margins.
The Problem with Revenue
The problem with “Revenue” is that nobody is looking at it end-to-end, although it receives a lot of attention. Product, pricing, sales, and collection are the key pillars of Revenue Management and every company has them covered, or at least they think they do. So, what is missing?
Unfortunately, looking at them as key pillars is exactly the problem. Pillars can stand on their own, but these four really depend on each other. We have seen that Finance functions that look at these as connected pieces perform better than those that don’t. This equips the Finance Lead to analyze scenarios where all four of them can be simulated at the same time, a powerful tool for optimization.
A smart finance team asks more than “how much discount are we giving?” Or “Did we collect 100%?” Or even, “Is my customer or product profitable today?”
The big concept that everybody is talking about today is Customer Lifetime Value (CLTV.) What is not always included in the conversation is how exactly do you measure CLTV? Is it based on the potential to generate revenue or is it based off the profitability margin from that customer?
When attempting to answer that question, people tend to overlook the role that controllable and uncontrollable factors play in converting those calculations into money in the bank. To be able to quantify someone’s CLTV, you need to be able to differentiate between all factors, controlled or uncontrolled, analyze them, and address them – for each customer, each transaction, each product, and even at each point in time separately. That is a lot of dimensions.
Think of Revenue as the Value that Customers Derive from the Products or Services They are Provided
Revenue Planning through what-if simulation can help companies optimize their revenue generation scenarios, and then track them end-to-end, this is possible through a hub-spoke framework that looks at each of the dimensions (customers, transactions, products, timing, etc.) in a cohesive environment. A model that is based on such a framework can aid decision-makers in planning for the unexpected and choosing the scenario with the best outcome. Decision-makers can solidify their revenue planning by using historical data as well as external sources data to train the system to provide more accurate insights.
To solve these problems, at Voiant, we partner with top technology innovators.
Analyze and Reflect; Understand What Is Important
It is beneficial to identify those scenarios that are negatively impacting the business's revenue, and anomalies in patterns indicate those negative factors. Some of these could include:
- Sub-Optimal Pricing or Product mix
- Unscientific Customer Account Scoring to set goals
- Mis-directed promotions and advertising spend
- Territory Assignment to Sales Reps not based on the most relevant factors
- Leakages during invoicing and collections
For example, I have seen companies lose 2%-5% of their top-line revenues due to leakages during invoicing and collections. This is especially true in the case of SaaS-based companies, regardless of whether they are B2B or B2C, and utility providers such as telecoms, and logistics service providers. Even if one were to ring-fence a quarter of such leakages, the impact on the bottom line would still be tremendous, i.e., 1% of revenues can transform into 10%-20% growth in net profits.
Similarly, territory and customer assignments should be well thought through. I have seen that companies assign territories mostly based on geography or product, and no analysis is been done on whether that is the best-serving approach for the company as a whole.
KPIs that are looked at in silos do more harm than good. Consider the end-to-end revenue cycle:
Imagine a leaking pipeline, where you are losing some of your earnable or earned revenues along each stage of the cycle. Ensuring that the input/output ratio is at its maximum should be the key concern. What occurs when adhering to this approach is that each part of the cycle is looked at separately, which becomes problematic. What happens then is that the KPIs of the primary function dealing with that piece are aligned to the ratio of the respective part of the cycle. At first, this looks perfect. Each process leader is maximizing their throughput, and everyone is happy. I have found that this approach causes two main concerns for the Company overall.
The starting point of the metric is the input into each part. Ideally, the output from the previous part should be considered the starting point to ensure that there is no “loss in transition”. So, if the invoicing was $100, then that as a metric should be used for the collection team, not the reported collectibles which many times is 5%-10% lower than invoicing, for various reasons.
Disproportionate KPIs within the system. E.g.: the collection part can only provide a small portion of upside in a prepaid SaaS type of business, yet the collection process manager tends to get a similar reward as other process managers receive. This causes disharmony and imbalance in the way key contributors are measured.
The intent is that TAM-based CLTV = Revenue, so the starting point is the starting point for the company, and the endpoint is the final money in the bank, and by looking at it this way, all of the factors are considered, analyzed, and corrected within the same simulation model.
If you can accomplish these things, your end-to-end revenue cycle will be more efficient, and each of the functional processes within it will contribute its maximum potential to the overall objectives of the Company.
At Voiant, we have a team of professionals that have delivered complex customized solutions that address unique client requirements. The team takes pride in breaking down complex problems into simple understandable requirements and implementing a robust comprehensive framework. We can create an end-to-end revenue management model that can help management plan and track performance, as well as continually draw their attention towards areas that deserve their attention the most.