Often one of the priorities for business owners is a focus on quality. Quality is measured and analyzed in products, customer service and employees. While it’s important to focus on the quality of operational inputs and outputs, it’s also important to think of quality of revenue.
Revenue quality is a description of revenue sustainability. Sustainable revenue is a great thing because it makes a business more durable by positioning it to more easily weather difficult external circumstances such as an economic downturn.
Revenue quality is made up of many different factors. Some of these factors include how likely it is that the revenue sources will continue in the future, how lucrative the revenue sources are, how varied the revenue sources are, whether the revenue is causally related to a competitive advantage, how costly it is for customers to choose alternatives to the offerings producing the revenue and how little marketing spending is required to produce the revenue.
The more of these characteristics a revenue source exhibits, the higher quality (and more sustainable) it is.
Higher quality revenue is revenue that is likely to recur. What percentage of your revenue comes from repeat customers? How many of your customers from this year were also your customers from last year?
The higher the percentage of recurring revenue, the more predictable your future revenue is. Remember how you keep hearing how important it is to keep track of your customers’ information? It’s not just for marketing purposes. Knowing who your customers are and their purchasing history is necessary to quantify recurring revenue and more accurately predict future revenue.
Higher quality revenue involves sources that contribute higher profit margins. Many businesses have more than one revenue source and each source has its own margin. How high are the gross margins on your products and services? Are there significant differences in the margins between your offerings?
Note your higher margin offerings as higher quality revenue sources. Then, focus on increasing your sales in those offerings.
Higher quality revenue is also diverse revenue. Revenue that comes from multiple sources is more stable than revenue that is dependent on a single stream or customer. How concentrated is your customer base? Fragmented customer bases are preferable over concentrated customer bases because they pose less of a risk to your revenue.
It’s like an investment portfolio: diversify to reduce risk.
Revenue that can be directly connected to a business’ competitive advantage is higher quality revenue. Your competitive advantage is a potential competitor’s barrier to entry. A revenue source that is protected by a barrier to entry is more sustainable.
Does your offering that produces the revenue in question lock your customers in some way? Revenue from locked-in customers is higher quality. It’s why there are so many contract and subscription-based revenue models now.
Finally, the less money that has to be spent on marketing an offering to generate sales, the higher quality that revenue source is. Offerings that require a smaller advertising budget are usually successful because of word of mouth.
Customers love the product or service so much they tell their friends. Revenue is generated from a natural demand that gains and sustains its own momentum instead of a constant high spend on advertising.
To increase the quality of revenue, consider which of the above characteristics are lacking and focus on making them more present in your revenue model. Higher quality revenue is more sustainable revenue, and a business with sustainable revenue is more durable and one that is likely to be around longer.
Jason Anderson is director of the Georgia Southern University Small Business Development Center. He can be reached at email@example.com.