Revenue: value generates money, not the opposite.
Revenue: value generates money, not the opposite.
The most popular phase in the marketing funnel. I guess we can all agree on that!
For your product or your company money could sound like the only thing that matters and, whether you like it or not, if you’re an entrepreneur in the current economical scenario, capitalism is part of your everyday life.
But is it still completely like that? We do see models today where turnover is not a direct goal. There’s a new generation of companies that hardly looks at that: growth in market share is all that matters. Take marketplaces, they usually involve winning the market before even introducing a revenue model.
“You can aim to make as much money as possible because if you make money, you will probably create value.”
“You can aim to generate as much value as possible because if you generate value you will probably earn money.”
Can you guess where growth hacking stands? Our goal is to generate value, and hopefully, we will be making money later on.
1. Revenue in the funnel
Awareness, acquisition, activation…we have come a long way, and we are now finally at the revenue stage. At this point, you should have a funnel that introduces people to your product, invites them to learn more about it, and they maybe have started using the product for the first time. Preferably with a nice aha moment. Now, we have to ensure that these people generate profit.
As we said before, if you believe that profit is the core of your product or service, think again. As a consumer, would you rather buy a product from a company that tries to earn as much from you as possible, or that is trying to try to build the best possible product? Sounds familiar? Yes, Product-Market fit. We are back at it. At the risk of sounding like a broken record, we will never stress this enough: if you want to earn money, you need a product that actually matters for a certain target group. Keep asking yourself how far you are from achieving this.
Anyway, the answer to the question is pretty simple and is also why retention only comes into the funnel later on.
2. Key Concepts
We can divide revenue it into two parts: increasing sales and reducing costs. They both result in profit, and there are three main concepts that are crucial to improve for a better turnover:
- Your revenue model
- Your pricing
- The value of customers (Customer Lifetime Value).
2.1 Revenue Model
How will you generate money from your product or service? Maybe you already have a business model, but try to be critical: does this really match your product? Ad-based/Affiliate/Indirect revenue, transactional, subscription, freemium. Go through this list of business models and see which one best fits your company.
Choosing the right price for your product is critical and a very tricky matter. People can find something too expensive or too cheap, you can offer things as a one-time sale or as a subscription, and again, divide your offer into differently priced products, or sell it as a package. In other words, when talking about pricing, possibilities are endless: you could be offering your product for free, or giving the chance to access a free trial before the paid version or again, using a freemium model. Whatever solution you are going for, be aware that pricing is -obviously- going to have a great impact on customer behavior.
To show that making a profit is not necessarily about making sales, let’s take a closer look at the freemium model. Think of Spotify, Slack, or Hubspot. The product already delivers its value without you having to pay for it, until you get to the point where you need that one feature that you have to pay for. But it’s too late, the product is so integrated into your everyday routine that paying is nothing but a natural consequence.
If you want to have an idea of the possibilities that lie within pricing, just look at airline companies. All of them have algorithms that link the price to how full the plane is, how long is the journey, and how many times you’ve already viewed the flight. That is why private pages are such lifesavers!
Testing your prices
Like all the other phases in the funnel, the final decision about pricing must be made through hypothesis and testing. Will we sell more if the price is X cheaper? Will our customer base increase if we market a less expensive, more simple version of our product? Formulate a hypothesis, test it, evaluate it, and start again.
You can also keep increasing the price until you see a drop in the number of orders. If someone immediately agrees, you can be sure that you have asked too little. Of course, your price also depends on your strategy: for many people, price is an indicator of quality, so it is expected that with a premium product comes a premium price.
Practical A / B test example
- Create two landing pages with different prices.
- Create two identical advertisements with different prices, pointing to the different landing pages.
- Wait until you have a significant number of conversions.
- Compare the conversions, and if the lower price performs better, calculate if the extra sales make up for the missed margin.
2.3 Customer Lifetime Value
Together with retention and referral, revenue is a phase in which it is easier to achieve growth compared to top-of-the-funnel phases. It’s safe to say that the most important metrics to take into account are:
- ARPU: Average Revenue Per User
- ARPPU: if you are considering only paying users)
- CLV: Customer Lifetime Value.
The easiest way to calculate CLV is to sum the revenue earned from a customer (annual revenue multiplied by the average customer lifespan) minus the acquisition cost.
Customer lifetime value is an important indicator of how much a customer is worth to you, besides, always keep in mind that your CLV should always be higher than your Customer Acquisition Cost. The balance between CAC and CLV is different for every company but, just to state the obvious, If your CAC is higher than your CLV, things will go completely wrong. It means that what you spend on customer acquisition is more than what you earn from it. If your CLV is three times or more your CAC you are in the right place and you have a nicely scalable model.