The term “revenue driver” refers to the primary elements influencing a company’s bottom line. These are the determinants of a company’s success and expansion. They are literally the factors that “drive your revenue” and help you figure out why you grew more or less in comparison to the previous period and help you make adjustments to your strategy.
In a nutshell, cash, assets, profits, and obligations on the balance sheet and loyal customers, reliable suppliers, and industry dynamics off the balance sheet are all examples of what we mean when we talk about revenue drivers.
The financial model you build will not produce an accurate revenue prediction without some educated guesswork. These estimates must be grounded in evidence, such as actual results or averages in the field.
If, for example, your revenue has increased by 10% MoM during the winter and 15% MoM during the summer, it will be easier to predict what your revenue will look like the next winter and summer based on these previous trends. But, if you construct your model using only these basic assumptions, you will lack the adaptability to make changes and conduct experiments. To solve this problem, you must refine your approach.
It’s helpful to have historical data showing that your growth rate is 10% MoM in the winter and 15% MoM in the summer. However, if you’re clueless about the factors that allowed you to experience more growth during the summer compared to winter, it’ll be difficult to plan and make modifications in the future.
While building a business from the ground up, understanding what factors will ultimately lead to increased revenue is essential. Because of their limited time, money, and manpower, most startups must prioritize revenue generation in order to finance expansion and keep their competitive advantage. Startups can improve their product development, marketing strategy, and sales methods by first pinpointing the specific factors that contribute to their revenue.
If you don’t know what activities will increase revenue, you may waste time and money on activities that won’t help your bottom line. Furthermore, by concentrating on revenue drivers, entrepreneurs can build a business model to survive economic downturns and market fluctuations.
As a new business, you must have a solid grasp of how to bring in the cash. How your startup plans to make money, or create revenue, is known as its revenue model. You will have a hard time succeeding if you don’t have a solid plan for generating income.
New businesses might choose from a variety of revenue strategies. Subscription-based business models have proven to be the most popular and effective means of income generation for startups — customers subscribe to your product or service for an ongoing cost. Building your business on the strength of this type of steady income from customers is a great strategy.
The freemium model, the advertising model, and the pay-per-use model are also common forms of revenue generation for new businesses. There are pros and cons to using each of these models, so make sure you pick the one that works best for your startup.
Keep in mind that your income model needs to be in sync with your company’s objectives. You’ll need a scalable revenue model if you’re gunning for rapid expansion. On the other hand, if profit is your primary objective, you’ll need a revenue plan that generates profit.
Making money and income should be the primary goals of every business plan. If you have a solid plan for generating income, your startup has a good chance of succeeding.
The health of your revenue model is crucial to your startup’s success. Essentially, a company’s revenue model is its blueprint for how it expects to attract customers and start making money. Know your revenue model inside and out, as it will have far-reaching effects on your finances and strategic planning from the get-go.
Startups can generate income in a number of ways, and the one that’s best for your company will depend on its specific circumstances. Ads, subscriptions, and one-off sales are the most typical ways that new businesses make money.
Startups often rely on advertising as a revenue strategy since it is simple to implement and can provide a reliable money stream. Through advertising, you provide a platform for companies to promote their products and services to your audience. Having a vast audience that is interested in the content and clicks on the adverts is essential for generating revenue through advertising.
When consumers pay a regular charge to get access to your content or service, you have a subscription revenue model. This is a standard business strategy for new companies since it ensures steady revenue in the early stages. Provide a service or product that customers are willing to pay for on a recurring basis, and you have the foundation for a successful subscription model.
The practice of earning money from each sale made constitutes a transaction-based revenue model. Products and services might be either tangible or intangible. Startups often use transaction-based models because they are simple to implement and do not require an existing audience. Offering a product or service that customers are ready to pay for and making the transaction simple is crucial to the success of this business model.
Your startup’s ideal revenue model should be tailored to your specific industry, product, and customer base. Discover what works best for you through trial & error. A reliable revenue strategy is crucial to bringing in the cash flow necessary to expand your organization.
Including revenue sources in your model allows you greater leeway and control over your expansion strategies.
In a rough estimate, say in Excel, you could round up the sales growth each month to 10%. Yet, if you incorporate revenue drivers into your model, you’ll have a clearer picture of where that 10% increase will come from.
How much of your revenue will come from Facebook and Google ads, podcast sponsorships, a focus on enterprise customers, and other factors?
The marketing-related costs that can be directly attributed to revenue are known as “marketing-led revenue drivers”. Here are some frequent ones:
Just about any form of marketing that results in increased sales falls under this category. Let’s get into the specifics below.
Your cost per lead is the amount of money you pay to generate one new lead (CPL). Cost-per-lead (CPL) is calculated by dividing the overall cost of your marketing channels (like Facebook Ads) by the total number of leads you hope to generate. For illustration purposes, let’s say you pay $1,000 to generate 50 leads, yielding a CPL of $20.
Calculating your CPL can be difficult because it is highly context and circumstance dependent. Predictions can, for example, be based on past results. For instance, if you previously had a $25 CPL, you can use that as a starting point. However, in some cases, you may not have access to adequate historical data, such as when testing a new marketing channel. Once you know your LTV, conversion rate, and ROI goals, you can work backward to pinpoint your ideal CPL (ROI).
Putting it in another way, you need to figure out how much money you can spend on each lead before it becomes ineffective. Due to inefficiency, you may be losing money, failing to meet revenue goals, or encountering other difficulties that reduce your overall profitability.
If your CPL is $50 and your lead conversion rate is 10%, it will cost you at least $500 to bring in just one consumer who will pay you for your services. Can you afford that, taking into account your set limit, the cost of the product, and the typical LTV?
The percentage of leads that eventually become paying customers is known as the lead conversion rate. This rate of leads that ultimately become paying customers can be determined by dividing the expected number of customers by the total number of leads.
For instance, if your Instagram ad campaign generates 200 leads and 20 of those leads become paying customers, your lead conversion rate is 20% (10/100).
If you want to estimate your lead conversion rate in the same way that you estimate your CPL, then you should look at your historical results. You can make an educated guess based on your projected customer acquisition cost (CAC) and client lifetime value (LTV) if you lack actual data. Bear in mind that your startup will go bankrupt if it spends more money acquiring a customer than it receives in lifetime profits from that customer. So, determine what percentage of leads must be converted based on your budget and desired outcomes.
For illustration purposes, let’s assume that your average LTV of a customer is $600 and that you have an Instagram advertising budget of $1,000. Our CAC must remain lower than our LTV, therefore, we can use those figures to determine what our lead conversion rate must be. After you have a ballpark figure for your CAC based on varying conversion rates for your leads, you can evaluate it in light of your customer LTV.
Keep in mind that your CAC must be lower than your LTV. In the SaaS industry, several professionals agree that an LTV to CAC ratio of 3:2 is ideal. You need three times as much money from each consumer as it costs to bring them on board.
For instance, if our LTV was $600, we would need a minimum conversion rate of 5% from leads in order to maximize our ROI. So if you want a safety net, go with the lower number. To be on the safe side, you may assume a 3% conversion rate for leads.
It’s vital to remember that, depending on your acquisition funnel, lead conversion may not occur immediately after acquisition. For example, if you offer a 30-day trial period, folks who sign up may not become paying clients until the trial time is over.
In contrast, other businesses may choose shorter trial periods, such as 7–14 days, to speed up the conversion process. Even with a shorter trial time, though, some leads may take longer to determine whether or not to subscribe. Additionally, a lengthier sales cycle may be required in some circumstances, notably for higher-priced products. As a result, leads may take many months to convert to paying clients.
When evaluating the conversion rate of your leads, it is critical to consider the length of your sales cycle and the trial period. Furthermore, it is essential to analyze the performance of your campaigns over time in order to establish how long it takes for leads to convert and make necessary adjustments.
The next step is to speculate which products your prospects will most likely buy (if you offer multiple plans and products). Depending on your definition of “customers,” you have a lot of room to get specific. You can divide your market into segments based on demographics like location, industry (B2B vs. B2C), company size (SMB, Mid-market, Enterprise), or any number of other factors.
For the sake of simplicity, let’s stick with the “normal” tiered SaaS pricing strategy, which includes the following:
In general, lower-priced plans are more likely to convert leads than higher-priced plans, so bear that in mind when developing your projections.
It’s important to remember that you should base your assumptions on reality rather than your hopes and dreams. It would be wonderful if every single lead you converted signed up for your most expensive plan, but what are the odds of that happening?
There’s nothing stopping you from using historical information, either. Have a look at how your current customers are distributed. Which percentages apply to which packages? Use that data to inform your projections. A revised monthly revenue forecast will be generated after you fill in those assumptions and add the driver.
You may learn more about how different marketing approaches might affect your bottom line by running what-if analyses. Effective goal-setting, efficient resource management, and data-driven decisions can all improve your marketing results.
Having covered marketing-led revenue drivers, let’s see how to build sales into your revenue model.
If you have a sales team, it’s likely that they are responsible for a significant portion of your overall revenue. You are able to create a model of what the increase in your revenue looks like based on their performance.
When modeling our income based on sales, much like when we were modeling the marketing drivers, we will need to put in some details.
Let’s get into the particulars of each one that follows below.
Attaching the revenue driver to a particular role should be the very first thing on your to-do list. If different members of your sales team fill distinct responsibilities, such as sales development representatives, account executives, or sales managers, for example, their individual quotas and goals are likely to vary.
You need to develop revenue drivers for each of the sales jobs that you have.
Define the position’s annual sales target. To reiterate, it’s helpful to give each driver a particular role. Your SDR team will have a different set of goals and targets than your account executives or other roles.
Having your sales force divided up by deal size can benefit significantly from this. If, for instance, you have a separate sales force dedicated to closing enterprise-level contracts, their quota will be higher than that of your small and medium-sized business (SMB) team.
Firstly, let’s discuss how long it takes a salesperson to become proficient. Your sales force, no matter how talented they are, won’t reach their quota in one month. Ramp time can be defined as the number of months required to achieve full speed. Trying to be realistic here can help you avoid overestimating your projected revenue. The ramp time for new salespeople or a less experienced sales team will be longer than for a seasoned sales team.
Then, calculate how much of your target you’ve reached. Even if hypothetically you set a goal of $100,000 per year, there is no certainty that you will earn that amount in a year. Certainly, a perfect score (or higher!) is the goal. Yet, this is not always the case.
If you’re an early-stage startup and haven’t quite figured out product-market fit, don’t fully understand your audience’s pain points, or are missing key critical product features, your team’s ability to sell will suffer.
Yet, you should not approach it in a defeatist manner. For example, if you plan to meet 60% of your quota, you should absolutely reduce your quotas to something more sensible. Next, estimate the percentage of quota your team will achieve while still on ramp.
It may take some time (maybe a few months) until your team is fully operational, but that doesn’t mean they aren’t earning sales in the meanwhile.
Identifying and utilizing unique revenue streams is essential for the success of startups. It is crucial to predict future revenue based on various elements and scenarios for effective planning and goal-setting. This guide outlined some of the critical revenue generation factors. However, it is crucial to continually monitor and adjust income predictions to ensure accuracy and financial success.
Furthermore, revenue drivers are constantly evolving, and startups must continuously evaluate and adapt their revenue models to remain competitive in the market. Ultimately, every startup has a unique income model, but by analyzing revenue growth drivers, you can create a model that fits your organization. With the right plan, mindset, and tools, your startup can establish a sustainable, growing firm.