Revenue models are more than frameworks for generating income. They play pivotal roles in organizational strategies. The model does not simply highlight where the organization earns its revenue; it also addresses the unique marketplace positions that the organization is hoping to champion to win over the customer. Resources and organizational goals should be aligned to the business’ revenue model.
The revenue model plays an important role as we work with businesses on organizational design and corporate strategy. One question that typically arises during discussions is: How do you make sure that your core strategy always produces measurable value?
During a recent meeting with a client, we were discussing their value proposition in the market and how it related to their core strategy. During that conversation, somebody mentioned the possibility of introducing a new service. Another participant pushed back. She said that while it might be a worthwhile project, she did not believe the company would be able to monetize the service. The group agreed, classifying the suggestion as more of an add-on offering than a core priority. Ultimately, they decided to remove the proposed service from their strategic plan because it fell outside the scope of what that business needed to do to win more customers and generate more revenue.
As leaders think about the elements of their organizational strategy, they should review each offering to determine the fit with how customers buy, make decisions and spend money. If an offering doesn’t contribute in a direct way to the revenue model, a refocus might be in order. Each element of strategy should produce a positive answer to at least one of these two questions:
- Does it help open the door to more sales?
- Does it provide opportunities for greater margins?
How these questions are answered provides major guidance as a business addresses its revenue model. Executives must return to the core strategy and review the factors that comprise the organization’s key strengths. Do the actions they take (or are considering taking) build on those strengths? Will they lead to greater margins or greater sales?
This raises several implications for leaders at all levels of the organization. For senior leadership, it begs the questions: is your team disciplined enough to make the trade-offs that will link offerings, activities and resources with your revenue model? Are nice-to-have or legacy activities allowed to promulgate and consume resources that could be better focused on your core, differentiating offerings? Are all activities in the organization aligned to help grow the business and/or increase profits?
Another implication is for managers in the middle levels of an organization. Middle managers tend to make decisions with the intention to please the requester, whether that be a customer, an internal stakeholder or senior management. If they address those requests without considering the implications for the revenue model, the organization may end up taking on activities or offering services that are expensive or add complexity to the organization’s operations.
Sometimes organizational strategy can become almost defensive in nature. Leaders may find themselves doing certain activities so they avoid someone else taking away what they already have: market share, key clients, etc. The distinction between defensive and proactive activities is an important one. Too often, organizations become complex and costly because they focus on providing things that do not answer the revenue questions above and are rather focused on protecting a reputation, a position, or a market share previously won. Customers may want the additional offering, and they will certainly take it if you provide it to them. But if it does not lead to higher margins or increased sales, you should question its value.
Companies can grow their revenue despite being fairly undisciplined. Lack of discipline and control over the scope of business activities can lead to organizations taking actions which do not enhance the revenue model. Carried to the extreme, this tendency can lead to gold plating. According to the Project Management Institute, gold plating is a type of scope creep in which developers decide on their own to add features they believe are useful or interesting. Gold plating is typically defined as working on a project or task well beyond the point of diminishing returns. A similar process can occur in ongoing business activities as well-meaning employees and managers add services and features that will not pay for themselves.
I recently came across an online image that illustrates this concept perfectly: a gold-plated toilet. It made me wonder, “Why would anyone actually gold-plate a toilet?” The gold plating might be a clever touch for a graphic designer, but, in the real world, it is a feature with no impact on the functionality the customer requires.
Over time, some businesses do the same thing: they gold plate their products or services. Eventually they may realize those extras really do not matter.