- CEOs and other executives want to know if their revenue engine is high performing
- Sales, marketing and product functions must all contribute equally for a revenue engine to perform successfully
- By assessing each function’s contribution to revenue engine success, executives can improve the predictability of future revenue and profit growth
All companies want to drive faster growth of revenue and, ultimately, profits – because investors and shareholders base a company’s value on the certainty of future revenue and profit growth. The goal of a company’s revenue engine, therefore, is to produce consistent revenue and profit growth.
But how do companies assess their revenue engine’s ability to generate the kind of predictable future revenue and profit growth they need? How do CEOs and other executives determine where problems exist or where they have opportunities to increase the output of their revenue engine? Let’s start by defining the components of the revenue engine.
Revenue Engine Components
At SiriusDecisions, we describe the revenue engine as consisting of all the go-to-market functions responsible for revenue growth: sales, marketing and product. CEOs tend to equate only their sales function with the revenue engine, but this definition is too narrow because product, marketing and sales must all contribute equally for the revenue engine to make the number. Frankly, when the revenue engine is narrowly defined as just the sales function, sales receives too much blame when growth targets aren’t achieved and arguably too much credit when things are going well.
To fully understand a revenue engine’s ability to reach growth targets, companies must be able to accurately assess all key functions’ relative impact on revenue growth. Are all functional areas (sales, marketing and product) executing equally well and contributing enough to achieve the company’s desired revenue growth? Which functional area is the weak link in reaching next year’s growth goals? How much of an impact are external factors making on the revenue engine’s ability to reach next year’s growth goals?
Only after executives determine whether all functional areas are delivering on their role in helping the revenue engine achieve desired growth can they identify ways to grow revenue and profits more consistently and efficiently.
Assessing Revenue Engine Productivity
The next step is to dig deeper into the revenue engine’s ability to scale efficiently to maximize future revenue growth and profits. There are two important indicators of future revenue and profit growth: productivity and efficiency. The most productive revenue engines can produce more revenue per sales and marketing full-time equivalent (FTE) than less productive engines when accounting for deal size. A key metric to use when assessing the revenue engine is revenue per sales and marketing FTE, which can be obtained by dividing the total output (revenue) by the total human capital input (number of FTEs).
Yes, a company could make this number look great in the short term by firing all sales and marketing personnel, but this would obviously have an impact on growth over time. A company that can drive up productivity per FTE will drive faster growth. Sales leaders can accomplish this by enabling reps to sell more deals, sell the same number of deals at a larger average deal size or a combination of these strategies.
Assessing Revenue Engine Efficiency
The most efficient and profitable revenue engines can produce more profit per dollar invested in sales and marketing than less efficient engines when accounting for deal size. For every dollar invested in the revenue engine, how much profit does each dollar produce for the company? What are the companies with the most efficient engines doing differently to generate more profit per dollar spent on sales and marketing than less efficient companies? How do companies achieve a highly cost-effective revenue engine that maximizes profit for every dollar invested in it?
Several factors affect efficiency across sales, marketing and product. A company that reduces the overall costs of acquiring revenue will improve the profitability of the revenue engine. One way to reduce these costs is to ensure that the profit a new customer will generate (lifetime value) is matched to the right cost structure to acquire that customer (customer acquisition costs). Companies should consider how to use new digital channels to build a no-touch, frictionless method for generating revenue from its least profitable customers, or how they can leverage inside sales to close with small and medium-sized business customers.
The revenue engine concept forces CEOs and other executives to take a close look at the contribution – or lack thereof – of each functional group to revenue growth. Revenue generation is a team sport and must be viewed as such, and by using productivity and efficiency metrics to measure performance, executives will be able to make the right decisions to improve that predictability of future revenue and profit growth that investors crave.
To learn more about the revenue engine, don’t miss Megan Heuer and Marisa Kopec’s presentation “The Customer-Obsessed Revenue Engine: What It Means to Deliver High Performance Today While Building for B2B’s Future” at the upcoming SiriusDecisions Summit, May 5–8 in Austin!