If growth is on your agenda, it is very important that you take a close look at the visual below, which represents what smart business owners do to grow revenue and profits:
Why is this visual so important? It highlights several important elements of strategic business growth.
#1. The importance of a good revenue stream model
#2. The importance of investing in marketing
Let me cover off these two elements, starting with a review of the revenue stream model.
A revenue stream model is a framework that outlines how you intend to generate and grow revenue and profits – especially the high value-back end variety. (Re-read my post on the four types of revenue for a refresher on this important topic)
In my experience many business owners and CEOs focus too much on the next sale or product launch without taking into consideration how that sale or launch fits into the wider strategic plan.
The revenue stream model focuses your thinking on revenue and profitability on a strategic level – unless of course if you’re operating the black hole revenue stream model which was the topic of my last post. As I stated in that post, the black hole model is the stupidest way to grow a business.
Anyway, let’s recap the key principles of the revenue stream model.
Principle #1. Everything starts with brand awareness. Without brand awareness you can’t get a customer.
Principle #2. Before you get a customer, you must have a prospect.
Principle #3. You need to focus on the back-end. Getting a one-time customer is the start of revenue and profitability. Real business growth occurs when you generate multiple sales/sales transactions to multiple customers.
Principle #4. Having a back-end requires you to offer multiple products or a product that can be sold to the same customer multiple times.
Some of the basic models include your basic back-end, the stairstep (where subsequent sales to a customer are at higher price points), the continuity/subscription model and the freemium model.
In a business there are two types of continuity – contractual-focused and service-focused.
Contractual continuity. Sometimes referred to as a subscription based service. This is where a business provides x product/service for x period of time to a customer over a contractually agreed-upon period. The simplest example of this is the monthly gym membership.
Some businesses add fish-hooks to their contractual relationships with customers in order to tighten the relationship in favor of the business – and often penalizing customers in the process. For example, some gyms/fitness centre are notorious for locking customers into forced continuity membership contracts that financially penalize customers who want to end memberships early.
One of the biggest disadvantages of contractual continuity relationships – especially those with fish hooks and high switching costs – is that it can make the business (owners and staff) lazy. Sometimes in this instance a business just focuses on clicking the ticket without giving too much thought to building a relationship.
Service continuity. Service continuity is a relationship based on a high level of trust and loyalty between a business and its customers.
A service continuity relationship may have a contractual element to it – however there are no fish hooks that obligate the customer to the business. So if the customer chooses to go elsewhere its relatively easy for them to do so.
A service continuity relationship puts the onus on the business to consistently provide good products and services to its customers…knowing full well that customers may run to a competitor if they become unhappy.
Whether it be service continuity of contractual continuity or a mixture of both – the idea of getting back-end revenue in your business is one that should be top of mind for you.
The importance of investing in marketing.
As shown in the visual you can see that the growth curve is shaped like a J curve, with the initial marketing investment designed to build brand awareness and a database of prospects. This is the price you need to pay to get a prospect into your conversion funnel.
Back in the early 1990s when I did marketing work for companies like Diners Club and Air New Zealand, they were quite happy just to breakeven or lose a bit of money on client acquisition marketing campaigns because they understood that the real money lies in the back-end. Which highlights a crucial point.
You must be prepared to invest on the front end in marketing. Marketing is your investment in the future.
More importantly, your marketing investment must be direct marketing focused as opposed to brand marketing focused. With direct marketing the priority is on getting specific responses for every dollar you invest in marketing, whereas brand marketing is primarily about building an image. Furthermore, with brand marketing there is no specific offer or call to action.
Good revenue stream model + good marketing = growth
When you have a good back-end focused revenue stream model supported by good marketing and customer service, you have the best of both worlds. It allows you to build your brand in a measurable way, acquire customers cost-effectively, and nurture relationships with existing customers as opposed to constantly having to go out and get new ones. And, as the marketing investment line shows, the cost to service and re-sell existing customers is far less than the cost to acquire a new customer. So your gross margin increases.