What is Revenue Optimization?

Meet Host, Mary Grothe

Mary Grothe is a former #1 MidMarket B2B Sales Rep who after selling millions and breaking multiple records, formed House of Revenue®, a Denver-based firm of fractional Revenue Leaders who currently lead the marketing, sales, customer success, and RevOps departments for 10 companies nationwide. In the past year, they've helped multiple 2nd stage growth companies between $5M - $20M, on average, double their MRR within 10 months, resulting in an average ROI of 1,454% and an average annual revenue growth eclipsing $3.2 million.

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Mary Grothe: Hey everyone, this is Mary Grothe - Founder and CEO - and you're listening to the Revenue Radio® podcast brought to you by House of Revenue®. Each week, we'll talk about common revenue challenges and how to get past them, share real-world experiences, and get a glimpse into my life as a CEO scaling my own business. If you're a struggling entrepreneur, or just an entrepreneur looking to be inspired, this podcast is for you. I'll give you honest, unfiltered, and practical insights into growing your business and getting past your revenue plateau.

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My team was talking about our blog strategy for this upcoming quarter. We started delving out keywords and key phrases that we believe our community cares about. In that process, we began to identify that the world has certainly adopted and taken on understanding revenue operations, breaking down walls and barriers between revenue departments. But is anyone really owning the full revenue funnel from an optimization standpoint? Or do we still have department heads in charge of their scorecard and their metrics? Who is taking all of that data and ensuring that revenue is optimized from acquiring all the way through retaining customers?

That leads us to believe revenue optimization should be a focus for us to talk about. What is Revenue Optimization? I would define Revenue Optimization as identifying and implementing new methods that make the process of attracting, acquiring, and retaining customers more efficient and cost-effective. That's what we're doing today.
When I first started consulting on small businesses, I learned how to make a pro forma. I learned early on to quote-unquote, know your numbers. Knowing your numbers allows you to make business decisions quickly. You're confident that those decisions will likely have a good outcome. The business runs off of the financial engine that you've built. The foundation for finance is critical in making any other decisions.

I once heard companies who bootstrap our way healthier financially with revenue optimization versus companies funded. When you're a funded company, you get a large sum of cash injected into the business multiple times throughout the lifecycle of your initial scale. You're not feeling the pressure and the weight of having pure revenue optimization and profitability out of the gate. In fact, you're raising money because you're upside down.

You can't possibly devout the product or technology by financing yourself off of revenue or cash flow. You can't add the headcount that you need to get the right people in the right seats when you don't have the revenue in the cash flow. Most commonly, this is seen in companies that do something with a product. So whether it's a technology or product, I haven't seen many service-based companies acquire funding and scale. It is more common in products and technology.

Well, what happens when you receive a chunk of cash is receiving that initial investment while you're in your product message phase. In the product message phase, you're not really looking for profitability. You need to report to investors. You need to prove that your hypothesis with your prototype can actually gain a handful of customers in the market. That's your product message fit or founder message fit. You have, as the founder, a problem that you've identified in the market. You've built a prototype or an MVP that you're able to take to the market to prove to your investors that people will buy this.

Typically, the initial early adopters are those inside that founder's network. They're able to attract those people through a relationship, but they spare no expense of getting the sale. It's not profitable. Then once you have enough people using your product or technology, you can start to transition to the early stages of product-market fit.
Pure Product-Market fit takes a long time to achieve. But once you can get a handful of good-paying customers on board, and they're on your product long enough, it may be 3 months, six months, 12 months, 18 months, it's different for every company, to get the feedback loop and the data that shows the problem you set out to solve is actually being solved. The customers agree with you. They're using the product or technology the way you said they would or should, and they're getting the results you said they would or should. With that, that's when you can start to say, "Hey, we have product-market fit." Now, you have something that you can get ready for a go-to-market fit. You go back and raise again.

Meanwhile, you're not tracking the finances. I mean, okay, let me give you some grace. You're probably tracking the dollars, but there's no revenue optimization at this point. If there is, there's very little. It's not the emphasis. Your emphasis is on obtaining that first level of product-market fit. You're trying to get to the level of what you can do in your first stage of scale. That startup scale, when you're trying to identify what that go-to-market fit is.

Once you've confirmed, you have a subset of customers willing to pay for the product and get the right ROI from using it. With that, you get another chunk of cash, and now you just go higher like crazy. You take portions of the rays. This is going towards R&D. This portion is going towards the tech roadmap and getting our technology even more. This portion is going towards hiring people. This is going towards our internal processes. Whatever it is. There is no correlation between the revenue we're bringing in paying our expenses. Revenue optimization is harder to achieve when you have a company scaling with receiving investment. You can still build your revenue economics.

If you need to understand revenue economics, go to houseofrevenue.com. Click on our tech SaaS page at the bottom of it. There's a Revenue Economics download. Grab that. It's a beautiful spreadsheet. It shows you how to model building a sales department and what your input, output, and profit will be. It's a pro forma built specifically for growing your sales department. It's a great model to show you 12, 24, 36 months. Please go grab that resource to learn more about Revenue Economics. It also considers pieces like your client acquisition costs, marketing expenses, etc. That will be helpful for you.

A company that has received investment and scaling off that investment has these spurts of expenses out. Then, they'll have the return on that with revenue coming in down the road. It's more difficult to have revenue optimization for a scaling company going through product-message fit product market for stage fit and go-to-market fit. It's more difficult to have revenue optimization there.

If you look at a bootstrap company, a bootstrap company typically has revenue optimization from day one. From day one, they're financing their company through cash flow. They know their numbers intimately. Bootstrapping is more common for service-based companies. Now, bootstrapping might also be coming for founders that can acquire a technology that's already written and the code is already in place. They're not shelling out half a million dollars out of the gate to get the technology. They may have acquired that they might have short-term debt against that, but then they can through the cash flow of early paying customers. They're able to finance the growth through revenue.

When you can bootstrap, your revenue optimization is typically much clearer. In that proforma or revenue economic sheet, you're able to identify exactly how we make money. Here are the 1, 2, 3, 4, 5 lines of business. Whatever it might be - ancillary products or services that we can sell. Here's the average revenue per client. Then you come back into a reverse funnel on that. How much does it cost to acquire a client? Well, when you build a reverse funnel, you can say, "Hey, we made a million dollars this year in top-line revenue, over 100 customers. That's 10,000 each, I think. Math isn't my strong suit. If I'm wrong, pick whatever number is correct while you listen to me.

If everybody was worth 10,000, you back into that number in your average revenue per sale. What was your close rate for proposals? For every proposal, how many did you close? Maybe it was 50%, so you divide the 10,000 by 50. You need 20,000 proposals to get it to close. Then, you look at how many you're closing per month. You back that number into how much pipeline you need to go into the proposal to close 50%. How many meetings do you need to have when looking at the pipeline? You divide that number out, look at how many calls, emails, nurture sequences, paid ads, social media posts, all of your attraction methods. How much of that do you need to do to get X amount of discovery meetings?

You need to look back through your numbers. It's all revenue optimization. When you're able to look at the numbers down to the granular expense on attraction, methods expense, and volume, how much does it cost us, and how many do we need to do to yield X amount of meetings? Then you have your expense around attraction into acquiring the customer. That reverse funnel is critical to understand.

Then we go into the whole second half of the bow tie funnel and get into retaining the customer. We'll pause for a second. The big difference between a bootstrap company and a funded company is that a bootstrap company typically has to adhere to growth as they can afford it. They often take on a short-term debt short through bootstrap growth, like an SBA loan or something to infuse a little bit of cash. You'll see bootstrap companies wait to invest in growth until they have a surplus of cash waiting, or their cash flow allows for that growth. That's what we've seen.

When we look at getting into the customer funnel, we should identify the cost of adoption. That's stage one of the customer journey in the bow tie funnel adoption, including new client onboarding, implementation, customization, and training. In that section of the customer journey, you should know your costs for adoption in labor, technology, resources, and length of time. Understanding those metrics, if you're looking to optimize the adoption stage, it takes us 90 days to accomplish all of that if you're looking at it as well. It takes three team members through the process.

If you're looking for revenue optimization, remember, it's the process of identifying and implementing new methods that make attracting, acquiring, and retaining customers more efficient and cost-effective. When you look at the adoption step, you're looking at making this more efficient and cost-effective. You're able to allocate $1 amount for the expense of the people, resources, and technology to get your new clients onboarded, trained, implemented, customized. Then, using it, giving the thumbs up, and signing off that they've adopted the technology and everyone in their company is using it.

You have no minimal risk of churn on that step because it's highly adopted. What is the expense to make that happen? Are you deducting that in your pro forma? Do you understand the cost of getting a customer through adoption? Secondly, what is your cost to retain a customer? Study shows it's 7% less expensive to retain a customer than to get a new one. You could start there as a benchmark. If you know your client acquisition costs, you could look at a number that's seven times less expensive than that. Retention is a really great benchmark. How much should we be spending on retaining a customer who is the key people in this?

Relationship managers, customer success, what is marketing doing to help with customer education, and ensuring that customers have everything they need? They're highly engaged in using the product or service. You don't have any early warning indicators that they might turn during this stage in revenue optimization.
Let me simplify this. If you're looking at understanding the cost of your churn, you should run more than just a regular churn analysis. You should look at the churn by lead source type of client dig into the granular level detail to understand if you have trends in churn. Maybe you do a churn analysis based on the size of the company or the stage that they're in.

Let's say you churn startups at 50%, but your retention rate is 90%. In mature companies, while you have a decision to think, do you stop working with startups because you're killing your bottom line with that churn rate? Do you optimize your process for onboarding, implementing, and servicing startups who may adjust how you built your product, technology, or service for startups? Do you modify what you're selling them to better meet their needs? You have to do a voice of customer interview or survey. You've got to create a feedback loop. You have to ask questions and understand that revenue optimization is not just a set of numbers. How were our KPIs? What are the metrics say?

Revenue Optimization is the process of identifying and then implementing new methods. A method is not enough. Technology is just technology. We're talking about the process of identifying, so audit, research, ask questions, compare the data, and then implement new methods. Typically a method would contain the process, methodology, technology, people, the how-to, but implement that feedback loop all the way around.

After getting through your churn analysis, you need to dig into revenue expansion to optimize revenue. One of the greatest areas that you can do is expand revenue on your existing customers. You should be able to identify, create a chart and say, "Hey, I have these customers. How many of them have products or services that we could sell them that they haven't yet purchased? Do that analysis. Identify the revenue per customer that you have sitting in the base that's unsold. Create an Account Management Plan per client to figure out how to secure that revenue.

You can also associate the expense of an account manager to that exercise and set a quota, a goal, and a commission payout to obtain that additional revenue. What is that worth to the company?

Then the last part is advocacy. How are you optimizing revenue through advocacy? Have you built a client incentive program that meets the client where they are and gets them excited to refer? Or are you relying on your sales team or account managers to ask your clients for referrals? Which, by the way, they don't do. When they do it, which is rare, it's awkward. Who else you know could benefit from using our product or service? That's so lame. People don't want to refer to that instance. They want to be led to refer because they absolutely love your product or service. You've created a pathway that is super simple for them to become an advocate. Hopefully, they get something in return.

Short story. I'm a gluten-free vegan. There's a pizza place by our office in Denver. As a gluten-free vegan, I have very few restaurants where I can pick out and eat something absolutely delicious. Usually, I'm stuck with eating a salad. Well, this pizza place has the best gluten-free, vegan pizza I've ever had in my life. I had purchased it multiple times, so we moved into that space.

I saw that they had an app, so I downloaded the app. I started ordering through the app. The next thing I knew, I had a pop-up on the app that said, "Use this link, just push this button, or click this," and it'll send a text message to your friends. You get a free treat, cheesy bread, and then a free pizza for every two people who download it. I was like, "Are you freaking kidding me? Do you know how easy they made it for me to refer?" I sent it to everybody that I knew. I've been eating a lot of free pizza. It's amazing. They made it simple for me.

Granted, it's usually easier to think of a client incentive program example when you're looking at a B2C sale, the consumer-driven sale. But if you're a B2B, challenge yourself to figure out how to create the same type of easy way to get people excited about referring. Whether they get free products, coupons, points, dollars off of their next invoice. What do they get to make it easy for them to make an automated link inside your technology? They could just push a button and invite other people to the platform should be the simplest thing you create.

It should yield significant returns that make the CSQL, Customer Success Qualified Lead. The CSQL is another form of revenue optimization because now we have the lifetime value of a customer. You've optimized all the way through attracting acquiring and retention. Now you're optimizing advocacy because the value of the client, typically the lifetime value, was always calculated by what they spend month over month, year over year, times how much time. Now, the value of your client increases if you can get them to refer because that client's acquisition cost is reduced on the front end. After all, CSQL has come from a paying customer.

You've optimized the process to where you don't have a huge expense to get them to refer. All of a sudden, you're optimizing revenue at a whole new level. You've reduced the client acquisition costs. There's no marketing cost. No sales expense to get this qualified referral into the funnel. They're not even really coming in by telephone because typically, referrals are much warmer. They're already in the middle of the funnel, considering the decision stage. The cost to acquire that customer is far less. If you continue that cycle with optimizing the advocacy step, your revenue optimization as a whole is going to be far less expensive to acquire an irritated customer than it's ever been in history.

Hope this was a helpful episode for you today to learn about Revenue Optimization.

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Thanks for listening to today's episode. If you're interested in being on our show or want to learn more about how we can help you scale your company, connect with us at houseofrevenue.com or with me Mary Grothe spelled G-R-O-T-H-E on LinkedIn, Twitter, or Instagram.

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