Revenues Archives | ariel lim consulting

3 Ways to Grow Your Revenues (Not Related to Advertising or Spending More Money)

January 23, 2020January 16, 2020 by Ariel Lim

Businesses often forget that increasing your revenues means you also increase your expenses. It’s only natural. As your sales go up, so does your cost of goods sold (COGS). For services, that would be your cost of sales. And that’s only considering the variable expenses. We’re not even talking about fixed expenses. At a certain point, this will also increase. But that’s for another time.

In my previous article, I talked about the only formula you need to run your business — also known as the profitability framework. I showed the relationships between profits, revenues, and expenses. Here, I’ll focus on the revenues.

What Are Revenues or Sales

Revenues, or sales, is the product of price and quantity sold over a period of time. Another term for the price is unit price or price/revenue per unit.

Revenue side of the profitability framework

Revenues = Price x Quantity

There are only 3 options to increase your sales:

Increase your price
Increase the quantity sold; or
A combination of both

Those are the only 3 ways you can do so. It’s mathematically impossible to increase your revenues unless they don’t fall under these categories.

How to Increase Revenues

Now, let’s expand the revenue formula further.

On the left side, the primary factor that affects your revenues/sales is your revenue streams. In the previews article, I refer to these as the different segments like customer type, product lines, region/location, etc. On the other side, the primary factor that affects your quantity is the frequency of purchase.

Let’s go through each in detail.

Grow Your Revenues by Having More Revenue Streams

Revenue streams are different channels or areas where you can sell or earn money. Of course, this will be different for every business. Here are a few examples of different revenues streams:

Sale of products
Income from rent
Dividends from investments

In the personal setting, this is oftentimes called income streams.

Answering the question, “where does your income/sales come from?” will help you visualize your revenue streams.

Increase revenues by adding new revenue streams

You can further generalize this into two categories:

Current revenue streams
New revenue streams

Your current revenues streams are where you are currently generating sales. This can be your physical store and your website. Maybe you have a sales team and someone who handles partnerships and resellers. Those are your existing or current revenue streams.

Then, of course, new revenue streams are those channels you haven’t earned from or explored at the moment.

Create a New Revenue Stream

One of the easiest way you can increase your revenues is by creating a new revenue streams. Contrary to popular belief, creating new revenue streams is simple and free in most cases.

Here are a few examples:

New Distribution Channels

For businesses selling physical items, the easiest revenue stream to capitalize on is selling on a new distribution channel. One example that comes to mind is the partnership of SM with Lazada.

Teresita Sy-Coson, daughter and vice chairwoman, said in an interview with Bloomberg, “If we can’t bring them into the store, then go to the house and sell to them.”

This move allowed SM to further increase sales without hiring more people and spending on commercial space — meaning, not having to build another mall.

Looking back now, this move makes sense. Instead of waiting for customers to go to their stores, SM can now sell to people who prefer the convenience of shopping online. Plus, if you factor in the worsening traffic condition in the city, it’s a great strategic move.

But 5 years ago, this was controversial news. Most businesses think that opening up new revenue streams will eat up their current one. While that may be true to some extent, that is not the case the majority of the time.

In fact, that’s what publishers have long said about the book industry.

“Selling eBooks will kill us.”

But that’s not true. After years and years of this talk, physical books still outsell their digital counterparts.

As long as you are providing value to your customers, your new revenue stream will not kill your existing one.

New Payment Options

Clothing retailers have long dreaded selling online. They wrongly think, as others, that this will eat up their current revenue streams. If you look at the US market, a lot of clothing retailers have closed down. This phenomenon has been dubbed as the retail apocalypse. But studies have shown that this demise is more a reflection of that particular retailer than reflecting the industry overall.

And this makes a lot of sense.

Oftentimes, companies who have established a presence and a safe market share become complacent. They fail to innovate. That’s why when new players enter the industry with something simple that every customer has already been asking/expecting, and the big players don’t provide it, they cry foul.

And in the Philippines, one of the earliest challenges faced by eCommerce merchants is the payment options. If you wanted to sell online a few years ago, the easiest would have been using PayPal. The problem was there are still a lot of Filipinos who don’t have a bank account, much more a credit card.

According to the latest research, only an estimated 22.5% of Filipinos have bank accounts. Then some estimates that those who have credit cards range only from 5-10% of the population.

That’s why offering COD or cash-on-delivery opened up a separate revenue stream for eCommerce merchants.

Again, looking back, these moves might look trivial. But a few years ago, these things were all expected by consumers but weren’t provided by businesses. But now, offering online purchases and multiple payment options have become the norm.

These are just some examples of how you can create new revenue streams easily. You just have to know your current situation, your industry, and connecting the two dots together would be easy. If you need help in that, don’t hesitate to let reach out and let me know.

The main takeaway is to focus on delivering value to your customers.

Grow Your Revenues By Focusing on Existing Customers

Now, let’s take a look at the right side of the graphic — the number of units sold.

Increase sales by increasing buying frequency

If looking at revenue streams is the primary factor has an effect on your price, the one that affects the number of units sold is frequency.

Frequency is defined as the number of times a person purchases from you. Here are some names you are most probably familiar with:

Once or multiple times
One-off payments or recurring payments
Single purchase or repeat purchases

Stop Looking for New Customers

This is one of the things I am most baffled about. Statistics show over and over again that it is easier to sell to an existing customer than to a new customer. In fact, the probability of selling to an existing customer is 60-70%, while the probability of selling to a new prospect is 5-20%.

However, the behaviors of businesses — its salespeople and decision-makers — constantly look for MORE customers. They forget about their existing customers. And this is reflected by poor onboarding/retention processes of businesses and the lack of metrics against retaining them (vs the obsession on customer acquisition).

Think about this for a second.

How many times have you made repeated purchases? Which providers or businesses? And most importantly, why do you keep buying from them?

Your hairstylist/barber
Uber / Grab
Ecommerce — Lazada, Shoppee, Amazon

Of course, this does not hold true for everyone.

But for the majority of us, and most of the time, we repeatedly use them (and pay for it) because of the value that we get out of it. They are familiar and deliver exactly what we are looking for.

I have been going to the same barber for 7+ years now. I also use Uber/Grab because I don’t need to have cash with me (something that I find valuable because I hate queuing in ATMs) and I get a pretty much consistent experience throughout (greeting and confirmation when I get in, asks for destination, doesn’t complain, uses Waze for directions, and just drive). It’s just so much easier.

Yes, there’s an argument for acquiring new customers. But oftentimes, businesses neglect their existing ones. If you have a great retention rate, and continually increasing your average order value, then, by all means, focus on customer acquisition.

But if your business is only selling one-off purchases, especially if your products/services is something that is meant to be used/re-used again, then there’s something wrong.

Conclusion

Every business wants to grow its revenues. I’m sure you do. And knowing what makes up revenues (price and quantity) will help you know where to focus on.

Expanded Revenue Side of the Profitability Framework

Low-hanging fruits are opening up new revenues streams, like using another distribution channel and allowing new payment methods and increasing your repeat purchases.

In other words, focus on your customers.

Stop looking at your competitors. Don’t get distracted by internal issues. Stop worrying about whether this new strategy will work or not. Go out and engage with your customers. Continue adding value to their lives. Listen to what they say that way you can provide the best experience for them. You don’t necessarily have to apply them all, but at least, it will give you insights that you never would have if you don’t ask and listen.

Here’s a quick homework for you:

Peter Drucker once said, “What you cannot measure you cannot manage.”

I’ll leave you with something to think about…

To increase the price — create new revenue streams
- How much of your sales should come from existing customers?
- What about those from new customers?
- Are there other markets (location or groups) that your current payment methods are alienating?
To increase quantity — increase frequency
- Do you have a metric for customer retention and / or churn?
- Do you have dedicated account managers that help your customers find value in your products/services?
- How much value should they contribute to up-sell / cross-sell business?

Again, I’d love to hear your thoughts on this. And I do hope you find this valuable. Feel free to reach out if you want to discuss this further.

The Only Formula You Need to Know to Run a Business

January 23, 2020January 9, 2020 by Ariel Lim

Running a business is hard. Whether you’re a 1-man team or running a 10,000-organization, it can get pretty complicated.

As an employee, you didn’t have to worry too much about other stuff other than your job. But as a business, you have to deal with them even if you don’t like it — financials, taxes, efficiency, tools and apps, and other decisions you just weren’t exposed to before.

But did you know there is a very simple way to manage your entire business? This magic formula that I’m going to share will allow you to look at the health of your business objectively.

Ready now? Here it is…

Profits equal revenues minus costs.

Profits = Revenues – Costs

Preparatory Points

But first, I recommend reading the real purpose of businesses. Why? Because what I will share here is a result of delivering value to your customers. What that means is before we talk about sales or revenues, you have to understand where it comes from and why customers buy.

Without that understanding, it’s easy to get lost in the world of business and its complexities.

So, go on and take a few minutes to read the article. You can always go back to this one anyway.

Done? Great.

The Profitability Framework

Let me share a very simplified approach to business that will weed out all distractions. Let’s go back to our magic formula:

Profits = Revenues – Costs

In consulting, this formula is called the profitability framework. It’s pretty self-explanatory but a very powerful tool when used correctly — which I’ll share later below.

For now, let’s define each part first:

Profits are what’s left after you deduct all your expenses from the revenues you earned in any given period.
Revenues are the sales from your customers. It’s the sum of all payments made to your at ay given period.
Costs are the total expenses your business incurred during a period. This includes salaries, rent, etc.

Simple, right?

Now, let’s look at the profitability framework from another perspective.

This is an expanded version of the profitability framework. Don’t worry if it looks a bit confusing. This will all make sense in a minute.

Let’s break it down.

Big picture thinking using the profitability framework

One of the key benefits of using the profitability framework is figuring out why something happened. Oftentimes, we are so busy running the business that you don’t take time to analyze what’s really going on and what’s causing it. This simple, magic formula will help you with that.

By looking at your profits and its components (revenues and costs), you would know how your business is doing. No complications.

If it’s positive, then you’re doing okay. If it’s negative, then you’re not doing okay.

At least at first glance.

By just using these metrics, you would have an idea of what you should keep doing, and what changes you need to make.

But let’s take it further.

We now know the what, but we don’t know the why.

You can segment your data and compare it with other time frames. For example, you want to look at this month’s performance versus last month. Did profits this month went up or down? Is that good or not? Why did it change?

(I also shared more about the three most common segmentation techniques you can use with the profitability framework below.)

Let’s take a look at the components that contribute to the revenues and costs. This will give you an answer to the why.

Analyzing the revenue side for the formula

Revenues are made up of two factors:

Unit price
Quantity sold

Looking at this mathematically, revenues is the product of the unit price and the number of items sold.

Revenues = Unit Price x Quantity Sold

Let’s take a look at Apple. Let’s assume they only sell the iPhone 11 and only one model. They sell it for $699. Last month, they sold 500,000 pieces.

That would make Apple’s total revenues last month at $349,500,000.

(Again, I’m making this simple by using only one number. An advanced way to analyze this is to look at the unit price and quantity sold per channel, per item, and look at different time periods so you see trends.)

In reality, Apple has multiple product lines like Macs, iPads, and other accessories. Within each product line, they have different models/versions like in the iPhone example, they have the 64Gb/128Gb/256Gb models. Each of those models, you have different color offerings as well.

Segmenting each part of the revenue formula gives you a better understanding of what’s really causing the what.

In our example, Apple sold $350m last month. Is that a good thing?

You might say, “If revenues went up, that should always be a good thing right? I made more sales. How can that be a bad thing?”

Not so fast.

The revenue side is just one part of the equation. You also have to understand the cost side. Allow me to explain.

Analyzing the cost side for the formula

Costs are your total expenses for the same period. It’s made up of two factors as well:

Unit cost
Quantity

Unit cost can also be broken down into fixed and variable costs.

Fixed costs are incurred whether or not you made the sale.
Variable costs are those expenses associated directly with the sale.

Let me explain these two concepts quickly:

You sell fruit shakes at a kiosk stand at the mall. Your fixed costs would be rent and salaries because even if you don’t make a single sale, you still have to pay them. Then, your variable costs would be the cost of the ingredients you used. If you advertise, then that’s a fixed cost too.

Again, when you apply some segmentation here, you would get a richer analysis. But that’s not what this article is about.

Analyzing performance using the profitability framework

In our Apple example, we left a question about whether or not the increase in revenue to ~$350m by Apple is a good thing.

The first thing to do is to look at the formula as a whole and ask these questions:

Did costs increase, decrease, or stayed the same?
Did profits went up, down, remained flat?
What caused the changes? Which product line? Which version? Which model contributed the most?

As you can see, using the profitability framework allows you to do all kinds of analysis. Knowing this formula by heart allows you to identify what is happening in your business.

Let’s take a look at another example below…

Profits declined by 20% this year. What caused it? Why did it happen?
- If your sales decreased by 20%, that’s the answer.
  - But which part of sales?
    - Did you sell less this year than last year?
    - Or did your selling price went down?
- But what if your sales increased 10%, yet profits went down 20%?
  - If it increased, then your expenses would have skyrocketed by at least 30%.
    - Again, which part of expenses?
    - Is it your fixed costs or your variable costs?

Segmentation Analysis

Now, if you use this framework with segmentation or “slicing and dicing” of data, you will gain huge insights like I alluded earlier.

There are multiple ways to segment, but the most common are these:

Time (daily, weekly, monthly, quarterly, yearly, etc.)
Location (branches, regions, countries, etc.)
Channels (walk-ins, phone, online, etc.)
Product line (desktops, laptops, phones, accessories, etc.)
Models/SKUs (64Gb, 128Gb, 256Gb, etc.)

Using the example in the previous section, your profits declined 20% and yet sales increased by 10%. After you segment the numbers further, you found out the Branch A’s sales remained steady. Branch B grew by 10%.

Now you know what’s causing the sales increase.

But that doesn’t solve what caused profits to decline.

When you apply the same principle on the costs side, you found out that Branch B’s expenses grew by 40%. Now, you have a more informed decision that Branch A is performing well despite the steady sales, while Branch B, despite contributing to increased revenues, is actually the one causing the decline in profitability.

Why Is This the Only Formula You Need to Master?

The single, biggest reason why this is the only formula you need to master is this: any organization will cease to exist if its profits are below zero for an extended period of time.

By looking at this formula alone clears all distractions.

Today, too many businesses are focused on shiny and exciting things that they often forget the basics. They are focused on getting investments, exits, IPOs, and all the other things you hear in the news. While nothing is wrong with those, you have to understand this in the original context of business — are you driving value to your customers?

Instead of spending your resources on those things, focus on this single formula and what it means for your business. It will give you an objective perspective of where you are right now and what you need to do.

At the end of the day, the only number that matters is profits. If you have profits as a business, it means you created value for your business and for your customers.

If for a prolonged period of time, your profits are below zero, you will close up shop. You are not creating customers. That means you are not delivering value.

If you are so down in the weeds monitoring the hundreds of metrics in your organization, yet fail to look at this very important number, it might be too late to pivot or to change your strategies.

If you are in this situation right now (which I certainly hope not), it’s time to rethink how your business delivers value to your customers. Whether your profits are positive or negative, take time to compare it with historical data. Segment it. Know which segment of the business is helping you create more value and which ones aren’t. Decide whether to continue with this strategy or not.

One tool I recommend using is the buyer utility map. It helps you find opportunities across the buying experience cycle that you and your competitors might have overlooked.

Don’t get lost in the complexities of running a business. Focus on a the basics first.