Copyright Atomic Dog Publishing, 2006

Copyright Atomic Dog Publishing, 2006

Chapter 5Revenue Strategy


5-1 Introduction

• Revenue provides the fuel for the entrepreneurial venture’s growth. Entrepreneurs general understanding of how each

component of the business contributes to revenue— revenue strategy.- Developing and executing a revenue strategy is about a

venture’s products and services and about its target markets.

- Revenue strategy is developed with input from various business activities, including marketing, sales, and customer service.

- The venture must also develop credit and collections policies.


Exhibit 5-1 The Five Components of Revenue Strategy


5-2 What Is Revenue Strategy?

• Providing a valuable product or service to customers is the primary means by which businesses produce revenue. The entrepreneur has three rules for success:

- Focus on the customer- Keep turnaround times short- Always give the customer what they want

In most businesses, the CEO coordinates the interaction among marketing, sales, and customer service functions—functioning as the vice president of revenue. - Functional divisions and the communication and

execution gaps that develop among them, are some of the major challenges that large organizations face.


5-2 What Is Revenue Strategy? (cont.)

- The entrepreneur must integrate the five components of revenue strategy into a coherent whole that focuses on delivering value to customers.

• Most large companies tend to gauge their success in terms of quarterly profit increases. Most traditional companies focus on profit

improvement more than revenue growth. The entrepreneurial venture, most focus on revenue

growth. Revenue growth in entrepreneurial companies is

achieved through an intense focus on customers. Acquiring customers begins with the marketing

message.


Exhibit 5-2 Growth Curve and Investment Cycles


5-2a Marketing

• Marketing varies widely, primarily because each venture must focus its marketing approach directly on its target customers and their buying habits. From the perspective of revenue strategy—develop

sustainable competitive advantage (SCA). - By studying what competitors are offering to the market

and attacking that market with a differentiated offering. - Protecting an SCA in a number of ways—trademarks,

copyrights, patents and trade secrets.- Defend an SCA by legal means, constantly improving

and introducing new and complementary products, or by conducting ongoing market research and analysis.

Another way that marketing contributes to revenue strategy is through analysis of consumer behavior and projections about future tastes and buying habits.


Exhibit 5-3 How an SCA Provides Competitive Advantage


5-2a Marketing (cont.)

• Knowing the company’s products and services and the factors that govern customer decision making—important requirements of successful marketing. The extent and amount of marketing conducted by a

company—function of its budget. - In the early phases of an entrepreneurial venture,

marketing budgets are usually limited. To maximize revenue:

• Entrepreneurs target a market, develop a persuasive message and use communication channels that routinely reach the target market.

• Entrepreneurs also leverage their contacts to generate low-cost marketing opportunities.

• Entrepreneurs observe the competition closely.


5-2b Sales

• Selling is the business activity that is most directly related to a company’s revenue. Inside sales—employed by the venture.

- Salespeople can be an expensive investment. - Most salespeople prefer to earn through commissions.

• Commission structure is an important source of motivation or de-motivation to the sales force.

• Sales compensation is complicated and must be fully integrated with the revenue strategy.

- Guidelines for entrepreneurs to follow: • Remember sales compensation is for employees

responsible for persuading the customer to act. • Realize that the company is going to change as it

grows and compensation has to change as well. • Understand difference between sales compensation

and total compensation.


5-2b Sales (cont.)- The role of salespeople is an entrepreneurial venture is

to adapt the marketing message to individual customer’s needs:

• Adaptive selling technique• Personal selling technique

Outside Sales—not employed by the venture- Direct Selling: Independent contractors who represent

and sell products for one or more clients. - E-commerce: Enable customers to learn about the

company’s products or services and to purchase them online.

- Party plan selling: Simplified distribution channel—manufactured products are sold directly to customers.

- Multilevel marketing (MLM): Network marketing—direct-selling process is duplicated by salespeople who sponsor and train others.


Exhibit 5-4 Number of Direct Salespeople in the United States

Source: Direct Selling Association, Washington, DC. www.dsa.org.


Exhibit 5-5 A Typical MLM System


5-2b Sales (cont.)

Telemarketing: An effective sales tool that every entrepreneur should at least consider. - Telemarketing in the United States has been set back—

the institution of a national Do Not Call Registry. - However, intrepid telemarketers are engaging in other

novel techniques such as calling cell phone numbers, which are not protected by the federal list.


5-2c Customer Service

• Many inexperienced entrepreneurs think of customer service as a necessary evil. Because customer service is an after-sale expense, it

constitutes non-revenue-generating overhead. Although customer service is often an after-sale

business function, it impacts revenue in two ways:- Dissatisfied customers may elect to return their

purchases—resulting in lost revenue. - Satisfied customers may tell others about their positive

customer service experiences—resulting in new revenue for the venture.


5-2c Customer Service (cont.)

Customer service strategies can become a source of competitive advantage for entrepreneurial ventures to determine a way to offer a service that competitors either don’t offer or don’t perform effectively.

Identify a challenging customer service problem in an industry and be the first business to find and offer an effective solution.

Emphasize pre-sale customer service as a means of acquiring paying customers.

Customer service can also produce revenue through the sale of warranties.

Customer service strategy includes the selection and implementation of appropriate technologies. - Customer relationship management (CRM) software


5-2d Credit and Collection Policies

• Venture must develop credit and collection policies, execute policies consistently to maximize revenue. Credit is based on the assumption that the customers

will pay later, usually with an interest charge. - The longer the customer has to pay back the loan and

the lower the interest rate charged by the lender, the greater will be the effect on sales volume.

- Increased sales volume is the primary objective of both the marketing and sales activities.

• If managers responsible for these activities determine the venture’s credit policy, the outcome is predictable—they would tend to keep interest rates low and payback terms long.


5-2d Credit and Collection Policies (cont.)

Granting credit without an established collection policy has ruined many businesses.

The company’s collection policy is the system used for collecting from customers who do not pay on time.

Accounts receivable refers to payments due from customers. - A company with receivables is loaning its cash to

customers instead of collecting it. - The average actual collection period is known as days

receivable and can be calculated as follows: • Days receivable = actual accounts receivable / sales

per day



When days receivables is greater than the venture’s credit terms—age accounts receivable by multiples of the credit terms.

Entrepreneur needs understands the concept of days receivable and aging, and other aspects of collection. - The longer an account goes unpaid, the more difficult it

becomes to collect. - A pre-collect notice is sent by a collection agency to the

debtor. - Collection agencies focus on collecting past due

accounts for businesses. • One law they must follow is the Fair Debt Collection

Practices Act, or FDCPA.



A new venture may occasionally need to take action to motivate a customer to pay, but customer retention is always important. - Retaining customers is important because it often costs

a lot of money to acquire them. - Customer acquisition costs—the time, resources, and

marketing collateral that are required to add a single customer to the firm’s customer list.


5-2e Multiple Revenue Streams

• Developing multiple revenue streams is important for a growing venture and should be a part of the firm’s revenue strategy. Developing multiple revenue streams with customers

has several advantages for entrepreneurial ventures. - Customers purchase more goods or services from the

venture, they increase their switching costs. - Increased sales per customer, leads to a higher return

on the capital that was invested to acquire the customer in the first place.

The effect of multiple revenue streams on the total revenues of a company is an important reason that single-product or single-service companies have a difficult time succeeding.


5-2e Multiple Revenue Streams (cont.)

Ventures can spin off new revenue streams into separate companies. - Advantages of entrepreneurial ventures—adaptability

and ability to pursue leads and opportunities quickly.

• The multiple revenue stream approach is an important tool in revenue strategy because: It leverages the investment made in acquiring the

customer in the first place. It helps the entrepreneurial venture diversify its

sources of income.

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Copyright Atomic Dog Publishing, 2006