More Revenue Streams Won't Make More Money

Levers will

NOTE: You should use your CEO Time to think about this because Revenue Streams are a component of Strategy.

Let’s Define Terms

“Make Money” means profit, not revenue. It’s best measured by an aspect of free cash flow called FCFE – Free Cash Flow to Equity. This is cash that investors (owners) can take out of the company to use for other things: growth, dividends, a holdco, a new boat, whatever – without hurting the company’s survival. I’m indebted to CFO Secrets for this concept. See https://www.cfosecrets.io/p/maintainable-free-cashflow.

“Revenue Stream“ is a term of art that refers to a combination of what you sell, who you sell to and how they buy. Here are some examples. A company that sells a product in two ways (retail and wholesale) has two different revenue streams. So does a sit-down restaurant that also provides catering. Same product, different market, sold in different ways.

McDonalds did not originally sell Big Macs or breakfast of any kind. I would argue that adding Big Macs to their menu was not a new revenue stream. It’s merely an added product sold to the same customers in the same way and bought for basically the same reasons. But breakfast is a new revenue stream – different products, sold in different ways, and bought for different reasons.

“Lever“ in this context a lever is something you can pull to get more profit or cash flow from your revenue streams. In other words, how can you get more profit by doing something different to increase the output of something you’re already doing?

It’s useful to think of all the costs in a company in three categories, each with many subcategories:

• Finding a customer (marketing and sales)

• Providing what that customer paid for (fulfillment)

• Keeping the lights on (all the other costs it takes to support the selling and fulfilling).

(NOTE – The fourth reason to spend money is for growth. That’s not relevant here.)

Leverage is a way to generate more profit without replicating all the costs that would be required to serve those customers if you started over from scratch. (This is different from how the term “leverage” is used to mean loans. Those multiply your potential for growth but also for loss. In contrast, this understanding of levers does not incur added debt.)

A lever makes the result more than the sum of the parts. Take the examples above. By adding a new revenue stream, a manufacturer adds the costs needed to sell to the retail market but does not add the cost of a factory they’ve already got. That’s leverage. Same with the restaurant designing and selling a catering menu. McDonalds must add the cost of new inventory, staff, training, and sales. But not the capital for the building, fryers and cook tops it’s already got.

The simplest lever to pull is an upsell. “You want fries with that?” They leverage what they’ve already paid to get you in the store, to sell you something else.

Answer these questions to uncover your revenue streams.

You’re looking for major differences in ways that uncover levers you can pull to either increase sales or decrease costs. Your answers should be directionally accurate rather than exactly precise. The only reason to do this work of mapping your revenue streams is to uncover levers. Otherwise it’s just a vanity exercise.

Every customer follows a path from prospect to profit.

Answer these questions to flesh out the details in that path. Then see if you can group them into different streams and identify the levers in those streams.

• What do you sell?

• Who do you sell to?

• Why do they buy?

• What is their buying process?

  • How do you reach them (marketing)?

  • How do you engage them (qualification)?

  • Who’s the decision maker?

  • How do you close them (proposal and sale)?

• How do you set the price?

• How do you fulfill what they buy? There are 5 subcategories of fulfillment: Design, Procurement, Assembly, Delivery, Customer Success. Most companies don’t utilize all five. But often the ones that you do use are where the levers are.

• What is their payment process, and can you speed it up?

Here’s a List of Levers

See which of them will apply to you.

Reduce collections costs, default risk or working capital needs

• Give discounts if they pay sooner.

Decrease CAC

• Upsell.

• Increase order size.

• Generate referrals and/or reviews from existing customers.

• Sell subscriptions (recurring).

• Encourage repeat or reoccurring sales.

• Volume discounts.

Decrease Sales Costs

• Breakout reorders from new sales. Have different comp structure for each.

• Use more targeted marketing. Learn to use Language Market Fit.

Decrease Fulfillment costs

• Use Lean to reduce waste.

• Reduce SKUs.

• Better deals with suppliers.

• Automation.

• Increase inventory turnover. In the days of department stores they typically had a 40% margin and turned their inventory 3 times a year. The company that went on to become Target cut prices so their margin was only 20% but inventory moved faster – 6 times a year.

Pricing Levers

• Bundling.

• Unbundling.

• Offer three sizes to increase sales of the middle one.

• Raise Prices. If you double your price and lose half your customers, you’ll make more profit. I know that’s an extreme example, but you get the point.

Overhead Cost Levers

• Maximize Throughput. Apply the theory of constraints.

• Minimize Work in Progress. WIP shows up as an asset on your balance sheet. It’s actually a liability.

• Change schedules. Four 10-hour days a week or double shifts with no overtime can be more cost effective and increase employee satisfaction.

Want More?

If you found this useful, let’s talk. You can schedule a free coaching call HERE. I promise it’s a real coaching call and not a sales pitch.