Strategy & Operations » Leadership & Management » Column: CFOs must identify value in existing revenue

Column: CFOs must identify value in existing revenue

Over the course of the next few months, Guillaume de Pommereau will guide readers through different ways the CFO can create value. Here, he examines existing revenue

A chief financial officer (CFO) is often seen by non-financial people as the master of reporting, the king of compliance and internal control, the person who speaks to the tax guys and the auditors, and often, unfortunately, the one who says “No” a lot. “No” to the extra spend, “No” to the refurbishment of the canteen, or “No” to the latest crazy idea from the marketing team.

It’s important to move away for this simplistic perception and talk about the CFO who creates value. The CFO can create value by implementing operational improvements which will help the growth of revenue, assist with cost reductions, and as a result, generate profits and cash flow. In so doing, the CFO will be actively increasing enterprise value and pleasing shareholders.

Sales force effectiveness and smart incentives (margin and growth)

If you are not satisfied with the way your revenue line grows year after year, and before launching a full and costly revolution of your approach, you need to make sure you are asking the right questions:

  • Do you have the right process to select your sales employees when they join the company?
  • Do you offer your new sales employees the right induction program allowing them to capture the essence of your company’s culture and value add of your product and services?
  • Have you deployed your sales team efficiently? By geography, by industrial sector, or by customer segmentation?
  • Have you armed your sales team with the best possible marketing tools to stand out in front of the competition?
  • Have you offered your sales team a relevant analysis of the competition? Do they know who they are fighting against?
  • Do you have the right customer relationship management system to keep track and build upon every initiative to get closer to a sale act?
  • Have you trained your sales team with the right skills, with negotiation skills being front and centre?
  • Finally, is your incentive system providing the right motivation?

On this last point, the incentive system, I wish to insist heavily. It’s worth emphasising that time must be dedicated to building the right incentive system: it is not that easy to design and deserves lots of thought to make sure that it is appropriate in size and direction.

First, some firms provide no incentives, with a fixed salary. In my view this is counterproductive. Indeed, the best way to motivate a sales team is to allocate a significant portion of the salary to variable metrics to reach. The weight can be 10- 20 percent for juniors and grow for senior managers to 30 percent or more. With this kind of incentive, the sales team will give you an undivided attention.

The target metric must also be well thought through. There are different trade-offs between a focus on revenue only in terms of volume or in terms of price. You can also focus on gross margin in terms of percent or value. If you want to capture market share and not care about profitability, you should focus on revenue only.

As a CFO, I prefer targets expressed in gross margin terms, as it helps the P&L the most. You can also think about metrics incentivising recurring revenue. A satisfied customer who buys repeatedly is a happy customer and his cost of acquisition is low over time.

Strategic accounts, end customers

Focusing on strategic account and end customers are two ways to improve your financials as well.

  • The idea behind strategic accounts is based on identifying and focusing on priority accounts, capturing and analysing critical information, and developing a strategy to expand and grow existing strategic customers relationships. This approach is crucial, given that it is ten times more expensive to acquire a new customer than it is to retain an existing one. In fact, some studies show that increasing customer retention by just five percent increases profits by 25 to 95 percent.
  • End customers. Often, your customer is not necessarily the end user. A car manufacturer sells to a broker, who then sell to the end user. A phone manufacturer sells the phone to a telecommunications company which then sells to the end user. In many cases, your customer is not the end user. To improve sales, you must attract not only your direct customer, but also the end user – ie your customer’s customer.

Marketing spend effectiveness

In my CFO career, marketing spend budgets have always been addressed as a “number”. For instance, did you spend 10 million or 12 million? Should you spend 15 million?

These discussions have always frustrated me because I believe that every marketing team is different, and some can do more with less money. So aside from the “number” issue, we must absolutely discuss about the “effectiveness” of the spend. The budget metrics should not be euros or pounds but market share gains, awareness metrics, sales conversion rate and others.

The marketing spend effectiveness must be a ratio of a budget to an outcome. But how, with a fixed amount of money, can we generate the highest possible amount of sale?

Pricing strategy

Pricing strategy is so rich and complex that it would be impossible to cover it comprehensively here. It is crucial, however, to know that the price of a product is one of the most significant strategic decisions a management team must make. The price level will be impacted by many dimensions:

  • Is it a high end or low-end product?
  • Is it a volume product or a rarity?
  • How will it position the brand?
  • Will it cover the relevant costs?
  • How will it shape profitability?
  • How will it sit in terms of the competition?
  • How could rebates, discounts, and loyalty programs impact recurring purchases?
  • Is it a one-off purchase or a monthly subscription?

It is also important to note that a strategic decision to reduce the price and go for incremental volume is an easy but poor decision to make:

  • You will never manage to increase the price back to where it was because the positioning and the value perceived have been degraded and will take decades to restore
  • The additional volume will increase your net profit by the value of the margin (say 15 percent of the selling price for example), while the reduction of price will reduce your net profit by 100 percent of the price reduction

A few tips on good pricing policies:

  • Never permanently reduce your price. For tactical reasons, use temporary discount or rebates
  • Always try to increase price regularly, it flows down to the net profit directly and permanently
  • If increasing price is not possible, try to upsell with additional bundled products
  • Try to add other services like guarantees, financing, regular services on top of the pure product sale
  • Try to replace a short-term relationship of just one sale with a long-term relationship with a monthly subscription. Recurring revenue is immensely more profitable than one-time sales.

Next month, we will look at product line development, product bundling and cross selling, and existing channel optimisation.

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