How To Create a Revenue Model
Aug 27, 2020
Imagine you’re a sailor long ago, and your job is to get across the ocean to a tiny island in the mid-Pacific. You’d chart your destination, make the necessary measurements and establish navigation points, and you’d set sail in, at first, the general direction of where you’re headed. Several times a day and night you’d check your compass, consider the stars, and use the tools around you to adjust your heading to stay on course to reach the tiny island. Along the way wind and storms or even unexpectedly calm seas might move you off course or slow down your planned timelines, but you’d quickly make adjustments. It’s not just the destination – your goal – that you’d have in mind, but the constant calibrations of how you’ll reach the goal. Many businesses start with a business plan that sets a goal – a tiny island you want to reach – and plots a general course to reach it. But instead of considering the course regularly, we often only check our maps once a year when planning for the next year. We’re surprised or discouraged when we find we’re not where we thought or hoped we’d be, or we’ve moved off of the planned trajectory, or – worse – we give up on our goal to reach our tiny island and try to find other islands closer to where we’re currently headed. Your Goals and Strategies act as the point on the map you went to reach. Your Revenue Model is your compass. Consult it regularly, and it’ll tell you where you are, where you’re headed, and even what you might do next to reach your goal.
All Things Are Never Equal
A common mistake we make is only looking at our revenue model once a year, often in a fall when we’re planning for next year. And we say, “all things being equal, I think we can achieve some goal this year.” Then we abandon the revenue model until next year, and meanwhile only a few months later we’re not hitting sales targets or market demand is changing and we find ourselves reacting instead of working against the plan. The thing is, all things are never equal. Nothing goes how we expected. This is why we need to re-evaluate what we know and what we think we know consistently and constantly in business. This is where a revenue model can show us how timelines need adjusting. It’s not the the annual goal is necessarily not the right goal, but it might not be the right timing anticipated to reach it.
Adjusting With Your Revenue Model
If you visit your revenue model at least every quarter instead of just once a year, you can detect and respond to changing product demands or market fit much more efficiently. You can adjust the solutions you offer in response to market demands. Or, your revenue model can indicate those adjustments needed to your timelines – the numbers are showing that you’re more likely to hit Q3 numbers in the Fourth Quarter. Which gives you insights into next year’s planning already. Instead of waiting to see what happens and hoping for the best, a consistently current revenue model shows you what’s actually happens and makes shaping your goals, and the strategies to reach them, much easier.
The Revenue Model Creates Context
At ProCFO Partners we talk all the time about putting your financial picture in context. Many financial reports provide insight on internal factors for performance but, by design, can’t adequately interpret outside factors that are also impacting performance. Think about how many plastics and clothing manufacturers quickly pivoted to masks and PPE development during Covid – the usual reports don’t reflect the challenges driving innovations, and companies that are still stuck in last fall’s business plans for the year aren’t probably doing great business anymore. The market needed something different. A CFO who understands how to put context behind a regularly studied revenue model can integrate insights across sales, operations, marketing and more to deliver contextual counsel on how, even with unexpected weather and maybe adjusting for some revised timelines, we can still reach a point on the map.
