Will This Leaders Decision Undermine The Revenue Goal? You Decide...

I was working with a colleague this week on a business in transition, and I’m afraid they’re making a BIG mistake.

This business is in the information/education space and is in the neighborhood of $5 Million in top line revenue.

And they’ve got a pretty small team so I suspect there’s some very healthy cash flow there.

But there’s a problem…

The leadership is looking at the wrong scoreboard.

And it's leading them to make a change I fear will cause serious damage to their brand.

Below, I’m going to share how I’m thinking about this problem…

Because as a leader one of your most important jobs is to ask the right questions and lead your team to solve the right problems. And when I work with clients, that’s one of the things we do together.

So here’s my “case study” style thoughts on this (without giving away any specifics of the business)…

1) What are we trying to achieve here anyway?

Anytime I’m faced with a problem in need of a solution I almost always start here. Because what you optimize for changes everything!

And in this case, the new leader is stepping in saying, “Whoa, we have a monthly cash flow problem here. Let’s’ fix that!”

Now the next step here was actually a good one - make your goal measurable. So MRR was chosen (monthly recurring revenue). I’ve underlined the word “monthly” above because that’s the big mistake I’m seeing…

The big change…

The big change they’re making to increase monthly revenue is moving to a subscription model (away from a one-time-payment for annual access model). I get it, subscriptions are sexy and drive higher valuations.

But let’s keep going and see why I’m against it here…

Let’s fast forward and see how this will play out…

My colleague happens to have a lot of experience in this market and business model. In fact, he’s led a similar business within the last two years who went through a similar strategic change.

You know what he discovered?

With a monthly subscription model people stayed for about three months. Then they churned out.

The transformation the product is delivering is a big one (and also valuable). In your first three months you’re still trying to figure out all the moving parts and haven’t experienced the big promise YET.

Which means, on average, your customer LTV is 3 months of payments.

Throwing away 9 months of revenue?

If they had stuck with the “pay an annual fee up front” model they would have 9 more months to deliver the transformation and create a happy customer.

Oh yea, and they’d have 9 more months of revenue in the bank up front (I'll save the "time value of money" tangent for another time).

But there’s more…

Side effects of this model…

This business depends on a sales team to close new customers.

And how do you pay a high performance sales team?

With commissions!

And do high performance sales people want to earn a full commission or a 1/12th commission?

You guessed it.

This model will also have a negative impact on how they’re able to compensate the sales team they depend on.

Now, you could tweak the commission model and pay the sales team more up front… But now you’ve done even more damage!

Remember, the whole aim here is to increase monthly cash flow.

And cash flow is what’s left over after you pay your commissions.

So now we’re taking in less money than before, and paying out more of it in commissions than before, all in the hopes of increasing monthly cash flow.

What you measure matters!

And that is why I underlined the word ‘monthly’ above.

When you’re in a leadership position your job is to identify the destination and lead the way.

Choosing what to measure and optimize for is a huge part of that…

But it’s often not chosen carefully or thoughtfully. And in cases like this, it can lead to enormous challenges.

Roots create fruits

This is one of my new favorite mantras.

Many business leaders admire the “MRR” fruits of other businesses. They see the huge valuations subscription revenue can drive, and they want it.

But what they miss is the roots that created those fruits.

The roots of a subscription based business are very different than that of an annual sales or one time sales business model. And if you don’t have the roots, you’re not going to enjoy the fruits.

What's Your Take?

I've shared my analysis and how I believe this will play out. What's yours? Remember, this is a brand transitioning from a "one time fee for annual access" model to a "monthly payments for access" model.

And they're experiencing a decline in monthly revenue right now (sales are slow. So they want to lower the price by making it a subscription).

PS:

Choosing the right focus for your team is just one of the ways I work with leaders to create profitable, scalable growth in their businesses. When business leaders work with me, they experience greater clarity and less stress. And their brands grow.

If you'd like to have a conversation about getting your business on the path to scalability, then let's talk.

Just reply to this email and tell me about your business.