To master revenue growth, you must first understand it. Put simply, revenue growth is a measure of how successfully a company is selling its products or services. You’ve heard the age-old saying, “Cash is king.” Well, this is the whole point of revenue growth, to get more cash flowing into your company’s bank account.
Earning more money is and will always be the driving force behind most businesses. And it gives investors, analysts, and stakeholders an understanding of how well a company is performing in terms of sales.
Let’s breakdown revenue growth to understand it better.
But First, What Is Revenue Growth?
The Business Literacy Institute defines revenue growth as the “increase (or decrease) in a company’s sales from one period to the next.” Essentially, it paints a picture of how much your company’s sales revenue has increased over time.
To get an accurate picture of growth, you must compare the revenue of several quarters, how consistent it is, and the reasons behind any increase or decrease in sales. For this reason, it’s not enough to look at the revenue generated in one period when assessing the health of a company.
It’s also important to understand that poor revenue growth in one or a few quarters is not necessarily indicative of a poorly performing company. You must consider the industry the company operates in and the economic factors at play. For instance, some industries such as tourism are seasonal and are significantly impacted by economic and socio-political factors. When assessing a company’s performance, always look at the big picture to determine the direction in which the company is moving.
Calculating Revenue Growth
Going by the Business Literacy Institute’s definition, revenue growth is a measure of the current period’s revenue compared to that of the prior period.
The Formula for Revenue Growth Rate is as follows:
Note: Revenue growth is always communicated as a percentage.
The periods in question could be weekly, monthly, or, more commonly, quarterly. For early-stage start-ups, it’s better to track weekly revenue growth as it gives a better indication of progress. Assessing month-over-month progress can be misleading as start-ups are likely to undergo exponential growth at the beginning. Remember, the revenue growth rate is a contextual metric because it measures comparative progress. It’s crucial to ensure your percentages exhibit an accurate trend as opposed to a one-time exponential growth curve.
Let’s use an example to explain this in-depth.
In the e-commerce industry, revenue growth is dependent on social media engagement, reach, and discounts. Therefore, it’s important to track such product discovery metrics and their corresponding sales conversion rates within a certain period. For instance, in 2020, online sales during Black Friday surged by 21.6%. In such a case, it’s best to compare revenue to a similar time (previous Black Friday sales) because using the preview period would give a misleading revenue growth rate.
How to Improve Revenue Growth
Revenue growth on its own isn’t enough to support a company if it’s operating under unsustainable conditions. Grow too fast, and you risk burning out. For instance, to increase their bottom line, companies could expand into unfamiliar territories or accept new projects before having the necessary resources at hand. Such companies are bound to crash and burn. Premature growth can be bad for business.
So, how do you sustainably increase revenue growth? Well, it depends on the company and the economic sector you’re operating in. You must start with an end-goal in sight – Determine what success looks like for your company and develop a clear strategy to get there. Once you have done this, you can focus on activities that will help you boost your revenue growth.
Here are some tactics you can use to improve revenue growth.
1. Raise prices
This strategy has some caveats, and if not approached carefully, it could have the opposite effect. Ensure you sell on value, not cost and always give your customers a grace period and plenty of fair warning.
2. Sell your product to more people
You can’t go wrong with this strategy. The key is to identify channels responsible for revenue growth and leverage them to your advantage. Always tailor your marketing approach based on what you have to offer. Some great marketing channels include:
- Email Marketing
- Content Marketing
- Discounts and giveaways
- Freemium Offerings – Offering a basic version of your product for free to gain early traction.
- Referrals and loyalty bonuses
3. Sell new, different products
Innovation is a vital ingredient of success in a fast-paced world – like in investing, always diversify. Diversifying your offerings is high risk but, if done well, has the potential for high reward. It’s always a good idea to increase your sources of revenue.
4. Leverage the power of repeat business
This is an excellent strategy for small businesses in particular. A customer appreciation gesture such as giveaways or discounts will lead your existing customers to their next purchase.
One Size Does Not Fit All
In a brutal, competitive marketplace, companies that don’t grow won’t last. Grow too slowly, and you’ll be left behind. The best revenue strategy for you is one that is tailored to your business and your clients. Remember, you can always look to the trends in your industry for inspiration.