How To Improve Your Revenue Streams - Part One
“Ok Isaac, we’ve done our financial model, but we want to make it…better”
A lot of people come to me with questions about their financial model, implying that there’s something to be fixed in their excel file.
If only that were the problem.
They say the fastest way to make money is with a spreadsheet – simply changing a 7% conversion rate to an 8% conversion rate can make revenues jump by hundreds of thousands of dollars.
Yes, there are ways of improving the document, but the best it can be is an accurate picture of what your business looks like today.
When people get upset with their model, it’s usually because they
a) don’t like the unflattering self-portrait, or
b) they’re not excited about how the future scenarios are shaping up.
Therefore, when we talk about improving a financial model, we’re really talking about making good decisions for the business as a whole, and measuring our guesses with the sheet.
There are generally three ways to improve a model:
Boost sales, cut costs and reinforce the weak points.
For each of these, we’re looking to explore all the options that are available to us, and give them a fair hearing.
Good ideas survive competition.
If the idea you’re already in love with is a genuinely great idea, you have nothing to fear.
If there’s a better alternative out there, shouldn’t you be happy to find it?
We use creativity, lateral thinking and optimism to assemble these ideas, then use dispassionate analysis to choose the best way forward.
David Ogilvy said “Strategy is Sacrifice”, and we’re looking to make clever trade-offs that give us the best case scenario.
Let’s start with the top line: Revenues
“Don’t treat sales like your mother in law”
Sales tend to fix problems – or at least make some tough times more palatable.
If we can find ways to increase our revenues (without massively increasing our costs), then we buy ourselves time and create free cashflow.
Generally speaking, there are five approaches we can use to grow our revenues, and it is worth exploring all of them.
The first is to boost our current market share, stealing customers away from rivals.
The second is to target a new customer segment, perhaps one that our competitors neglect.
The third is to sell a new product/service to our current customers, increasing the total good/services they buy from us.
The fourth is to raise prices, finding the right amount to charge each type of customer.
The fifth is to increase our customer’s rate of consumption, so they spend more per annum than before.
In this post, we’ll look at the first and second strategies, then in the next post look at the third, fourth and fifth.
Stealing Market Share
“Marketing, like war, is a zero-sum game.
If you want something you have to take it from someone else.
In order for someone to win, someone has to lose.
Adam Morgan described it as “like a knife-fight in a phone box”.
There isn’t anywhere to hide.
There isn’t any place for bystanders.
Everyone has to choose.
Do they want to be the predator or the prey?
Because, if they don’t choose, the choice gets made for them”- Dave Trott, Predatory Thinking
Your next 1,000 customers are not imaginary, they’re real people who are currently shopping with other businesses.
Maybe not your direct rivals, but nonetheless they’re spending money to achieve particular aims, and you’re looking to intercept them with a better offer.
This is not easy, especially since you’re not the only one attempting the manoeuvre.
It’s worth thinking about your direct and indirect competitors.
Direct competitors are businesses in your industry, who sell similar products to similar customers.
Think of Toyota vs Honda, Nike vs Adidas, Mac vs PC.
These are often easy to identify, and are usually fiercely contested markets.
Indirect competitors are alternatives that sell completely different products to the same customers, which achieve the same underlying result.
Think of cinemas vs sporting events, perfume vs stilettos, Instagram vs magazines.
They are harder to identify, but can be absolute goldmines when you get it right.
For example, who was Nespresso’s competitor?
Not really, Nespresso were one of the firsts in their category.
The pods were better than instant coffee, but not as good as a barista made latte.
Their customer wasn’t choosing between instant and a 90c pod, or between a 90c pod and a $4.20 flat white.
Instead, their real competitors were plunger coffee and bad cafes.
That middle ground has since suffered dramatically, and Nespresso is all the better for it.
Or look at the music business.
Records were replaced by cassettes, which were replaced by CDs which were replaced by iTunes and Napster.
Apple came in with the offer of picking just the songs you like, and not being limited by physical media.
Spotify then swooped in with the “All you can eat” approach, while Apple Music struggles to catch up.
Either way, there is a finite market – everybody has a system that they like, and so future companies have to tempt them into making a change.
New Customer Segments
In order to avoid the bloodbath, companies look to untapped markets.
This presents an opportunity and a challenge – you have the chance to win over a large audience, but you have to put forward a very compelling case.
Old Spice did this when they repositioned themselves as being a masculine brand for young men, instead of selling to their grandfathers.
George Lucas did this with Kenner, framing his Star Wars characters as captivating toys for kids.
Cirque Du Soleil did this with their challenge of creating a circus worth $100 per ticket, attracting a crowd who would have not otherwise gone to Ringling Brothers.
Companies who do this well start with the question “Who else could like what we offer?”
They’re not limited by history, but instead think creatively about how what they do might hold appeal to under-recognised markets.
It’s worth looking at your audience, and seeing who’s interested in what you’re selling.
Then you want to understand why they like you.
It might be that you’re solving a problem that you never knew existed.
It might be that there’s a new tribe of customers that only came about in the last few years.
It might be that what you thought was one segment is actually two, with vital distinctions about why they buy.
I find the Value Proposition Canvas is a useful framework for sketching out ideas about customers – who they are, what they’re looking to do, the pains and gains that drive them, and how they recognise/measure value.
Selling New Products To Existing Customers
If you have happy customers, there’s a good chance that they’d like to continue the relationship and keep the warm fuzzy feelings going.
Please note, engaging happy customers does not mean spamming everyone who’s ever shopped with you.
Nor do I mean the awful Jetstar approach of trying to upsell your customers seven different things while they try and buy a simple plane ticket.
I’m talking about the genuine fans, the members of your tribe.
What would delight them?
If they like our main product/service, what else would solve a pain point or give them something that makes them smile?
Look at what Supreme are doing with their limited edition products – customers paid US$30 for a brick with Supreme written on it, and these now sell on eBay for US$1,000.
IKEA started their cafeterias after the founder, Ingvar Kamprad, learned that customers were cutting their shopping expeditions short due to hunger.
You wouldn’t have thought furniture shops would naturally expand into the meatball game, but IKEA decided to built a low cost lunch option in the middle of their stores.
This allows customers to re-energise themselves as they go through the market hall, who are now likely to buy more items.
Earlier we looked at George Lucas and Star Wars, who are champions of this game.
What started as a sci-fi movie is now a genuine empire, with obscure side characters having their own mythology and household name recognition.
That hasn’t come through repeat viewings of the original films, but rather through the games, books and toys that bring the magic to life.
Every kid who saw those movies would love a toy lightsaber, and secretly their parents would too.
LucasArts made some of the best video games of the 2000’s.
The “Expanded Universe” allowed writers to take the rules set out in the films, and create intricate worlds and characters that readers adore.
Tesla have done this with the move from cars into household batteries.
For owners of their cars, having a Powerwall battery allows them to draw electricity during cheap off-peak rates to recharge their cars.
It also allows non-car owners to participate in what Tesla is doing, and makes the eventual leap to an electric car much easier.
Elon Musk also sold hats for another of his projects – The Boring Company.
He then promised their next product would be flamethrowers, and he delivered.
These are sometimes called Brand Extensions – where a business jumps into a different product category, but with the trust and credibility of their existing brand.
I can rattle off examples of where it has worked, but there’s a huge survivorship bias; we tend to only remember the ones that worked, forgetting the vast sums of money wasted on bad ideas.
The main principles behind the successes are to thoroughly understand your customer’s motivations and deal-breakers, then enter industries that are comparatively weak.
I may love my Sennheiser earbuds, but I’m not looking to buy a Sennheiser phone.
In other cases, it’s just a matter of seeing where your customers are immediately before and after they shop with you, and building your own version.
Melbourne Airport allegedly makes more money from parking than it does from hosting airlines, and similarly Sydney Airport allegedly makes more money from their shops and restaurants.
The airlines themselves try to influence your choice of car hire and accommodation, making referrals in exchange for commission.
Michael Caine once told his friend Vidal Sassoon the secret to wealth:
“It’s simple. You must have something that is working for you while you are asleep. For instance, successful musicians have got it made, their records or music are being played all the time, every day, somewhere in the world. No matter what they are doing, they are still making money. You are a great hair-dresser, but you can only charge so much for a hair-do and you can only stand on your feet for so long so there is a ceiling on the amount of money that you can make. So, you’ve got to make shampoos and other products that work for you while you are asleep”
That’s some brilliant advice.
What’s your way of making money while you sleep?
What new products can be automated, or rolled out without your direct involvement?
Up next, we'll look at even more strategies for boosting your revenues...