3 Steps to Creating Your Revenue Formula

3 Steps to Creating Your Revenue Formula

The following is adapted from Levers.

As a business owner, do you know what your company’s revenue formula is? If not, you should. That’s because your revenue formula is how you turn your product, sales, marketing, technology, customer service, and every other department into a mathematical equation that guides you as you run and grow your business.

Identifying your revenue formula is absolutely critical to building and growing your business because it gives you maximum control of the drivers that matter in your business. Because a revenue formula is so important, I want to guide you through how to identify your own. 

There are three broad steps to do this: establish a theory, identify the drivers for your key values, and then identify the subdrivers for each driver. Work along with me while I walk you through each one, and by the time we’re done, you’ll have your company’s revenue formula set up and ready to go!

Step #1: Establish a Theory

Let’s start by putting a stake in the ground. Get out a piece of paper or sit down at your computer. Write down your current theory of your revenue formula. To give you a place to start, consider Business.com’s revenue formula: Visits x Coverage x Conversion Rate x Cost-Per-Click = Revenue

Another example of a revenue formula comes from a company called Chowbotics. Chowbotics are robots that make food, specifically salads, and are typically found in places such as airports, hospitals, or small cafeterias that don’t have salad bars. Chowbotics sells their robots to their customers, and then the customers decide if they will charge for salads or not. Their revenue formula: Number of Units x Cost/Unit/Month x Months Installed = Revenue

Without overthinking and trying to be perfect, take your time and write down what you think your formula is. If you can rattle it off in thirty seconds, that’s fine, but if it takes more time, that is okay, too. Come up with something that articulates what you think it is today so that we can go out and prove it right or wrong. 

Step #2: Identify the Drivers for Your Key Values

Once you’ve written down your theory about what your revenue formula is, it’s time to move on to step two. Ask yourself what are all the known things that can contribute to growing your top-line value?

For the sake of this example, we are going to take only one value from the Business.com example and outline all the things that drive it. However, your job is to do this for every value in your revenue formula. 

Additionally, we will come up with five drivers for our example value. When you do this exercise on your own, note that you may have less but likely more than five drivers per value.

Let’s start by looking at our current revenue formula and pick a single value to work on. Have you picked your value? Once you have, start making a list of the next-level drivers that you need to either do or prove in order to move that value, which you should now think of as key metrics for your business.

Need a little help? We’ll choose the visits value within the Business.com revenue formula to work on. Here are the five drivers I’ve come up with for visits, remembering that this is a list of things we do or prove in order to confirm that visits are actually a main part of our revenue formula:

1. Direct: People who came directly to the Business.com website. 
2. 
   
3. Paid: People who came to the Business.com website because of a specific, paid, online acquisition tactic.
4. 
   
5. Trade Shows: People who came to Business.com because of a trade show that we either exhibited at or attended.
6. 
   
7. PR: People who came to Business.com because of our PR strategy and efforts.
8. 
   
9. Radio: People who came to Business.com because of a radio ad they heard.

As you are likely thinking, these are all obvious, and that is a good thing. It means we have a starting place and can start to develop a plan.

Step #3: Identify the Subdrivers for Each Driver

Before we get into this next part, make sure you have some time, at minimum thirty minutes but ideally at least an hour, where you won’t be interrupted. This step is tedious but mandatory if you want to really dig into your revenue formula.

Although this section is going to sound a lot like the last one, it’ll be roughly five times the work. Again, we will demonstrate only one driver to work on here, but you’ll need to do this for every driver you’ve identified so far. 

In step two, we decided to work on visits, which gave us these five drivers: direct, paid, trade shows, PR, and radio. We will use the paid driver here, which represented digital acquisition. The next step is to pick five subdrivers of paid. These are the more specific tactics that we need to actually do to see if paid is a valid tactic to drive the right users to Business.com. Here are the five subdrivers we’ve come up with and why: 

1. Google—great for general search.
2. 
   
3. Facebook (FB)—Most business owners are always thinking about their business, even when on a nonbusiness social network.
4. 
   
5. LinkedIn—Business owners network here.
6. 
   
7. Twitter—Businesses and business owners congregate here for news and information.
8. 
   
9. Vertical Ad Networks—More specific to where business owners may spend some online time when working.

Keep in mind, right now this list is simply nothing more than a theory of where we might find our users and increase visits. If you know who your customers are, what they’re buying from you, and why, then when you find the right channels, it’ll be like shooting fish in a barrel.

Knowledge is Power

So that’s it—the three steps to coming up with your company’s basic revenue formula. Once you have this revenue formula, you know (without guessing) exactly how your company will create a revenue stream, as well as what drivers and subdrivers are vital for that revenue. Of course, you will need to test it and refine it, but the foundation is there.

It’s hard to overemphasize how powerful this document was for us at Business.com and how powerful it can be in your business. By following these three steps, we literally created the map we used to drive revenue by ten times. If you follow these same steps, chances are high you’ll be able to do the same.

For more advice on how to use your revenue formula to grow your business, you can find Levers on Amazon.

Amos Schwartzfarb has been growing businesses for twenty-five years and investing in startups for the past ten. Since 1997, he’s helped build companies that sold to Yahoo!, R.H. Donnelly, The Home Depot, plus over sixty more as Managing Director of Techstars Austin. He's also the bestselling author of Sell More Faster. Trevor Boehm was a writer before finding his way into building companies. A serial founder, he has also invested in more than forty startups, many of those through Techstars’ first Impact accelerator and as Managing Director of Alexa Next Stage, a program run with the Amazon Alexa Fund. He is currently at the venture fund Saturn Five. Learn how to apply Levers to your business at leversbook.com.