There is an old joke about two blokes who have a business selling indoor plants. Bill buys 100 plants for a dollar each. Dave drives them to the market and sells them all in ones and twos for a dollar each. He takes the $100 back to Bill and together they try to work out how they can make more money. They think on it over a beer and decide that tomorrow they’re going to need a bigger truck.
There are always only three ways to increase profit in business. Sell more, increase your price, or reduce your cost. The most profit comes from getting the combination right. When you think about it, what we are all looking for in business is revenue efficiency.
When you break that down; we understand that revenue comes from sales, so where does efficiency come from? The answer might depend on how you define efficiency. If your business is only as efficient as the competition, can it still be considered efficient or is it just average?
The business that can achieve efficiency, gives itself a massive competitive advantage. Efficiency reduces cost and increases capacity – simply by getting more from the same input or assets. Trying to grow while you are not efficient is like loading up a buckled wheel. Things get out of control very quickly.
What limits sales is not always market conditions, very often it's the capacity of the business. So, the secret to growth, is understanding the weaknesses or strengths of the business, in relation to capacity or revenue efficiency.
Where is your business competitive or not competitive?
Supply efficiency – producing or buying the 100 plants. Operations efficiency –customer service, administration & running the business. Sales efficiency – the process of pricing, marketing and selling the 100 plants to get the revenue.
Four questions to ask if you want to improve revenue efficiency:
1. What are we really good at? What is our unique proposition or competitive advantage? 2. How does that manifest itself? How do our customers know we are good at that? 3. Do we capitalise our strengths? How well do we turn that strength into profit? 4. Where are the gaps in our performance? How can we execute better or more efficiently?
What might a start-up do in your industry? – Netflix / Blockbuster case study
The benchmark I like to think about when looking for revenue efficiency is; What would a new start up do if they were stepping into this industry? The hallmark of a start-up is disruption, which is typically achieved through disintermediation. Put simply, they step into an industry and remove inefficient intermediary processes or entities between the supply and the marketplace. In most cases they do this by applying emerging technology, but it also requires reviewing the business model. One example is Blockbuster Video and Netflix.
Launching in 1998, Netflix took on a retail-based $16 billion home video sales and rental industry. Netflix's initial business model included DVD sales and rental by mail. (source: Wikipedia)
The obvious difference between Blockbuster and Netflix was that Netflix weren’t married to a retail infrastructure cost in their distribution. However, retail had the advantage of accessibility for spontaneous demand. In early 2000, the going was tough, and Netflix approached Blockbuster to buy them out for $50 million dollars. Blockbuster knocked them back.
Also in 2000, Netflix introduced a major change. They stopped offering single DVD rentals and introduced a subscription pricing model. Whether intended or not, this change in pricing / marketing strategy created a different product from the same resource. The new product was essentially a movie channel that arrived each week by mail.
You could ship five or ten titles for the same price as one. Supply efficiency reduced cost. Lower cost leveraged consumption elasticity while increasing lifetime customer value. The result; revenue efficiency. The whole customer relationship paradigm shifted, and a new industry was ultimately created. In 2005, Netflix was shipping one million DVD’s every day. Streaming did not gain traction until 2010.
While it is easy to look at such examples and wish we could be part of something like that, we often overlook the real opportunities of applying similar thinking to our own market. The simple inertia of arriving at work on Monday morning and following the same routine has real energy. To find performance improvements and growth we need to challenge that tendency and regularly question the efficiency of business performance.
The first step to improving revenue efficiency is to ask a few simple questions.
There is a strange human trait I have observed over years, that you can try in your business. When I sit down with someone to discuss a review. The first question I ask is, what do you / we do really well?
Ninety percent of the time the person immediately comes back with their roadblock. “I could do a lot better if . . .” or “The trouble I find is . . .”
After the potential solutions to improve performance or revenue efficiency are uncovered, try to avoid the temptation to immediately ask what it will cost. Instead, first ask; “How much is it costing us not to act on this solution?”