How good is the quality of your company’s sales?

Business owners consider revenue as a fundamental measure of their business growth. However, behind this superficial figure lies a deeper story that distinguishes one company from another.

While two companies within the same industry may show similar revenue figures, the underlying dynamics of their revenue streams can be vastly different. The quality of sales is an important differentiator between companies that seem similar at first glance.

Shaped by many different factors that go beyond purely numerical elements, quality revenue also embodies elements of sustainable growth, customer loyalty, innovation capacity and strategic decisions of the company’s leadership. Let’s list some dimensions that impact a company’s overall revenue quality.

First, revenue origins reveal crucial insights into a company’s customer acquisition strategies. The sales that come from extensive marketing campaigns can lead to immediate results, but may lack the longevity that typically comes from selling through organic customer referrals. When a lot of marketing money is spent to acquire new customers, the customer acquisition cost (CAC) is high. Newly acquired customers will increase revenue in a given year, but the question remains how long those customers will remain customers. In other words, will the marketing dollars lead to increased sales in the long run? Much will depend on the repeat business of those new customers, who depend on the ‘value for money’ you get when you buy the product or service.

Second, the composition of sales also reflects a company’s innovation and product diversification power. Revenues from cutting-edge products indicate market relevance and adaptability, while dependence on outdated offerings can leave a company vulnerable to obsolescence. Finding a balance between innovation and existing products is crucial to ensure sustainable revenue streams. A simple question to answer is what percentage of sales comes from products that the company did not offer five years ago. A percentage of around 20% usually shows a healthy balance, where the company manages to find a balance between the sale of older dairy cows and new products with high potential.

In addition, the distribution of sales between high- and low-margin products will influence a company’s profitability. Ideally, the company only sells the products with the highest margin. However, the reality is not that simple. Sometimes a mix between ‘razors’ and ‘blades’ is necessary. Some companies have low-margin products (the “razors”) that they need to sell in order to sell complementary high-margin products (the “blades”). Think of Pepsico with Sodastream. The Sodastream water maker sale will be a low margin sale, but they need to do this to get high margins on the flavors and CO2 cylinders.

The number of products contributing to sales is also a factor to consider. High product counts can lead to operational complexity, potentially hindering flexibility and efficiency. However, a very low product count can pose a concentration risk, exposing the company to vulnerabilities due to market disruptions or competitor innovations. Finding the right balance between product diversity and simplicity in business operations is crucial. The number of products that make up total sales is to some extent industry dependent, but it is still a factor to take into account. Fewer products will generally increase operational efficiency, leading to better overall margin per product.

Additionally, companies should measure what portion of revenue comes from ‘easy to serve’ and ‘hard to serve’ customers as this determines the scalability of revenue. If revenue is growing by 20 percent, but all the growth comes from customers who need a lot of after-sales attention, you can ask whether this is a positive thing because it requires additional resources, such as potentially more FTEs in the customer success team.

Finally, the predictability of turnover must be taken into account. Are we serving customers who will return next year or are these one-time sales? Ideally, you will have a high percentage of recurring revenue, as the cost of serving those customers will likely decrease the following year.

High-quality sales will be the result of the relationship between many different factors, such as strategic choices, innovation efforts, the quality of business processes and efforts to be highly customer-oriented. If companies pursue sustainable growth, they should not only have turnover as a KPI, but also look at the building blocks that determine the overall quality of a company’s turnover.