With the fourth quarter of 2017 now underway, many B2B companies have already started their planning for 2018. Over the next several weeks, senior company leaders will be evaluating how their business is currently performing and setting goals for the coming year. Some of those goals will inevitably relate to revenue growth, and one thing is clear: Marketing leaders are squarely on the growth hotseat.
In a 2016 global survey of CEO’s and CMO’s by Accenture Strategy, 50% of the CEO’s said their CMO is primarily responsible for driving disruptive growth in their organization. About a third of the CEO’s also said that the CMO is the first to go when growth targets aren’t met.
To set realistic growth objectives for 2018, and to implement marketing programs that will effectively support those objectives, marketing leaders must have a clearly-defined revenue growth strategy. One critical – but often overlooked – step in developing a sound revenue growth strategy is identifying where growth will come from. Specifically, marketing leaders need to answer three basic questions during their planning process:
- What are the structural sources of revenue growth in our business?
- How much growth is each source currently producing?
- How much growth can we realistically expect to generate from each source next year?
I described the most common structural sources of revenue growth in an earlier post
, so I won’t repeat that discussion here. The following diagram depicts the sources of growth that exist in most companies:
How Much Growth is Each Source Currently Producing?
In this post, I’ll discuss how to answer Questions 2 and 3. When I work with clients on business or marketing strategy projects, I use sales data from the client’s ERP/accounting system to answer the second question. Here’s a simplified example of how the analysis works.
Suppose that your company had total sales of $110 million for the 12 months ending on September 30, 2017. In this example, I’ll call this 12-month period “2017.” You had total sales of $100 million for the 12 months that ended on September 30, 2016. We’ll call this 12-month period “2016.” So, your company grew sales by $10 million during 2017.
For this example, let’s suppose that your company did not acquire another business or introduce any new types of products in 2017. During 2017, your company did begin selling in a new geographic market. Under these circumstances, your primary sources of revenue growth in 2017 were base retention, increased sales to existing customers, sales to new customers in existing markets, and sales to new customers in new markets.
To quantify how much revenue growth each of these sources produced, you would use “sales by customer” data from your ERP/accounting system.
Base retention (revenue churn) – To measure the impact of revenue churn, identify the customers who bought from you in 2016, but did not buy from you in 2017. The total sales made to these customers in 2016 is the amount of revenue that was “lost” in 2017 due to revenue churn. For this example, let’s say the amount of lost revenue was $1 million.
Increased sales to existing customers – Identify the customers who bought from you in both 2017 and 2016, and compare the 2017 total to the 2016 total. For this example, let’s say that sales to existing customers increased by $3 million in 2017.
Sales to new customers in existing markets – Identify the customers who bought from you in 2017 but did not buy from you in 2016. Then eliminate those customers who are based in the geographic market that you entered in 2017. The sales made to the remaining customers are sales to new customers in existing markets. Let’s say this source accounted for $5 million of the 2017 revenue growth.
Sales to new customers in new markets – This is the total 2017 sales made to customers in the geographic market that you entered in 2017. Let’s say this amount was $3 million.
The table below summarizes the results of this analysis and shows where growth in 2017 came from:
How Much Growth Can We Generate from Each Source in 2018?
Once you know where your current growth came from, you can use these insights to set more realistic and achievable growth objectives for the coming year. The key is to analyze why the current growth happened.
In our hypothetical company, for example, sales to new customers in existing markets produced $5 million, or 50%, of the total sales growth in 2017. One possible explanation for this growth is that the overall market for the company’s products or services expanded in 2017. In other words, the growth may have resulted from being in “the right market at the right time.” It’s also possible that this growth occurred because the company took customers from competitors and increased its market share.
Either way, the important questions is: How much future growth can the existing markets provide? If the existing markets still have substantial growth potential, the company will probably want to focus a significant amount of demand generation efforts on acquiring more new customers in these existing markets.
On the other hand, if those existing markets do not have significant future growth potential, the company will need a different strategy to drive growth. It may, for example, want to focus more demand generation efforts on acquiring new customers in the geographic market it first entered in 2017, or it may need to consider expanding into new geographic markets.
This type of analysis should be done for each source of revenue that contributed to current growth and for any new sources that are expected to contribute next year. Once this analysis is completed, you should set revenue targets for 2018 for each source of revenue that applies to your company. And once these revenue targets have been established, marketing leaders can begin to design marketing programs to achieve those objectives.
Top image courtesy of ccPixs.com via Flickr CC.