Part 3 of 4: Deep Dive into Revenue Formulas: Uncovering the "Whys" Behind the Numbers

In our last couple of blog posts, we embarked on a journey to better understand the dynamics of revenue formulas and their implications on business strategy. Today, I will further dissect these formulas, using an excerpt from my book, LEVERS, which provides a detailed framework on the topic. I'll use two very different examples from the book. In part 4, we'll go into how you can create your own Revenue Formula

1. Business.com Revenue Model

Business.com operated as a B2B search engine, selling search similarly to Google. However, they were exclusively focused on business products and services. Their revenue formula seems simple at first glance: Visits × Coverage × Conversion Rate × CPC = Revenue. But when you delve into it, you realize the myriad of processes and intricacies involved.

a) Visits: Not just about counting heads, but understanding the type of visitor, the page they land on, and ensuring the content is right. While marketing drives the visits, it’s the combined efforts of the product and technology teams that ensure optimization.

b) Coverage: While the metric indicates the percentage of pages with clickable content, it's also a guide for sales teams to focus their efforts where the most revenue can be generated, ie: where to focus sales and where to avoid.

c) Conversion: A dance between ensuring the right user experience (product team), creating that experience (technology), ensuring the right traffic (marketing), and matching with the right advertisers (sales).

d) CPC: Although primarily a sales metric, it also leans heavily on the technology team's shoulders to ensure real-time metrics visibility and the optimization of the order of the advertiser.

It's imperative to understand that while the revenue formula is focused on making money, it’s not all about sales. It’s a window into how each department contributes to revenue. Also, a point of interest is the significance of churn. Business.com’s mastery over the revenue formula and W3 ensured a detailed understanding of their customer base, leading to low churn rates and matching the right visitor with the right advertiser.

2. Chowbotics Revenue Model

Chowbotics, on the other hand, operates in a different realm – selling food-making robots, primarily salad makers, in places like airports, hospitals, and cafeterias. Their formula is straightforward: Number of Units × Cost/Unit/Month × Months Installed = Revenue. But again, behind this simple facade lies a maze of processes and strategies.

a) Number of Units: While it's essentially about how many robots are deployed, there’s a plethora of considerations behind it. Who should you target? What kind of robot should be built? How to handle logistics and delivery? These questions touch almost every department.

b) Cost/Unit/Month: The challenge here isn’t just about setting the right price but ensuring it fits within the broader financial health of the company. Finance, engineering, marketing, and sales all play roles in setting and achieving the right cost per unit.

c) Months Installed: Extending the lifespan of each installed unit requires efforts beyond sales. The product has to be durable and meet expectations, analytics should be provided to the customer, and the client service team should focus on ensuring customer satisfaction.

Conclusion

A company's revenue formula, while often appearing linear, has layers of depth that provide insights into its operations, strategy, and inter-departmental collaborations. By understanding the intricacies behind these numbers, businesses can make informed decisions, optimize processes, and drive growth more efficiently.

The take-home message from these deep dives is clear: Always ask "Why?" Behind every number, every formula, every metric, there is a reason, a strategy, and a story. As you approach your own business metrics, envision that persistent voice asking, "Why do you believe that to be true?" – and dive deeper.

Up next - how to go about YOU building a Revenue Formula for your business.