Revenue Quality Matters


Show me a business owner, and I'll show you someone who wants to grow revenue and profits. All too often, however, that same business owner overlooks the importance of improving the quality of his or her organization’s revenue stream and instead places too much emphasis on revenue quantity. 

What, exactly, is meant by quality revenue? Business expert and author Andrew Sobel defines quality revenue as revenue that:

  • Aligns with your business strategy and the type of client work you aspire to do
  • Supports your profitability goals
  • Provides work that is engaging to your employees
  • Leads to references and client referrals
  • Provides opportunities to work with clients who are respected in the marketplace
  • Enhances your brand and capabilities over the long term

In short, revenue quality matters, because ignoring it often leads to poor decisions that commoditize the business and threaten profitability, particularly when facing economic headwinds similar to those currently in play. 

Symptoms of poor revenue quality include too many one-off projects versus deeper, long-term relationships; a large number of small and/or single-service clients; always scrambling for the next piece of revenue; a sales pipeline lacking in strategic opportunities; and difficulty retaining top-performing employees. How many of these symptoms are present in your business?

Fortunately, there are steps you can take today that can significantly improve your quality of revenue and overall financial well-being. Sobel and others suggest the following, for your consideration:

1. Clarify and strengthen your client acceptance criteria. Your business plan should clearly and formally identify the type of business you seek. Possible acceptance criteria include the following:

  • Type of client (e.g. business or individual, size, location, etc.)
  • Revenue potential
  • Relationship emphasis (Is building a trusted relationship with you important to the client or are they always pursuing lowest price?)
  • Initial size of the relationship (Will the relationship remain small, or is there realistic potential for its expansion?)
  • The management level you want to work with (Keep in mind that middle managers are often constrained by rigid budgets, while more senior managers are focused on growth of revenue and profitability.)

It's critically important that everyone in your organization understands exactly what is deemed to be acceptable and desirable new business.

2. Build a diversified revenue stream. Businesses that rely on a single or limited number of revenue sources are typically more vulnerable to economic downturns, competitive threats, changes in consumer tastes, and seasonal fluctuations. Prominent examples include companies like Peloton, Blockbuster Video, and Blackberry. 

Following is an example of smart, strategic revenue diversification. 

Consider a veterinary clinic that also provides doggie daycare services, longer-term pet boarding, and behavioral training classes. It may also offer a broad range of pet nutritional and grooming products at the retail level. With five distinct revenue sources, this business is less likely to experience a revenue decline should a new competitor enter the market. Offering these services also increases barriers to entry for competitors.

So, if you haven’t done so already, examine your company for revenue diversification opportunities. 

3. Be careful in pursuing small account relationships. Unless you are intentionally pursuing small accounts and relationships for strategic reasons, be careful. Small relationships typically consume as much time and resources as larger, more profitable ones and may impact your ability to pursue and properly care for those larger, high-margin clients.

According to Sobel and other experts, “Small projects usually lead to more small projects. And, they eventually brand you as being someone who does small, transactional bits of business. Don’t engage in wishful thinking – few acorns ever turn into oaks.”

4. Manage pricing more confidently. Fearing loss of existing clients and/or difficulty in attracting new ones, it’s easy to tolerate a pricing structure that does not properly reflect the value your company adds to a client relationship. However, assuming you are busy, it may be a good time to strategically increase prices/fees, especially if you are willing to reinvest those additional profits in order to add even more value to your client relationships.

In terms of price sensitivity, clients typically fall into one of the following categories: 

  1. Not sensitive to small changes in price: These are typically clients for whom you are doing high-value, mission-critical work…and…who happen to be high-margin businesses themselves.
  2. Somewhat sensitive to price increases: This group is large, but it’s members will often accept negotiated increases if the rationale for doing so is sound. 
  3. Highly sensitive to price increases: Members of this group are often in low-margin businesses characterized by a laser-focus on expenses. 

By segmenting your clients per the above criteria, it will be easier to implement targeted price increases, thereby resulting in minimal resistance and dissatisfaction.

5. Ensure employee alignment on acceptance criteria. All employees must clearly understand your company’s ideal client profile, specifically the types of clients and client problems they are focusing on in their business development efforts. A lack of understanding will undermine profitability goals and your company’s value proposition.

With growing evidence of more challenging economic conditions ahead, there has never been a better time to examine your business for ways of improving revenue quality and how it can better support your company’s longer-term strategy. The strategies identified above are a great starting point.

Aristotle once said, “Quality is not an act, it is a habit.” Ensuring quality of revenue is one of the smartest business decisions you will ever make.

Related Blogs

Sign Up For Our Newsletter