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How to Create Bottom-up Revenue Goals that Make Sense
It’s that time of the year. Sales leaders are with their salespeople in the trenches driving hard to finish Q4 strong and executives are looking forward as they establish new fiscal year revenue goals.
I observe owners and executives in my small and mid-sized business target market falling into two different groups as they review how their current year has played out. While Q4 is still active, predicting an outcome is practical by considering current sales pipeline volume and deal positioning.
Typically, the group that is on-track to meet their revenue target took a logic-driven approach to developing their goal. This resulted in their sales leaders being equipped to develop cohesive sales plans that accounted for the various revenue goal segments.
The other group took a top-down approach to establishing their revenue goals based on what they thought was possible. These growth trajectories are seldom achieved and cause great frustration within your team.
This is because a top-down approach to setting revenue goals doesn’t work most of the time. If you are heading into the new year using this approach, you are likely setting yourself and your sales team up for failure.
Now is the time to slow down to take a more strategic approach that will give your company a realistic revenue target based on more than hope.
In this article I share knowledge I’ve built-up over decades with the objective to help you build a revenue target that you can believe in. Once you’ve developed a logic-driven revenue projection, you’ll have the foresight to align your business to achieve the expected result. Let’s get started.
Bottom-Up Approach to Revenue Goal
I have rescued too many doomed sales teams that were chasing after a revenue goal that they simply were never going to hit.
Some revenue targets that come to mind are 50% growth or doubling sales from last year without anything changing to make it possible like additional sales staff, new product offerings, a solid marketing plan, an acquisition to accelerate growth.
Don’t do that.
When taking a bottom-up approach, you’re not starting with your desired revenue target, you’re ending with a number that can be strategically achieved through effective planning and execution.
Step 1: Calculate Base Revenue
Your first step is to define “base revenue”. This comes from your current customer base and the work you have already contracted. Whether your business model has a recurring revenue stream or not, a business can look at its historic trends to determine what their current customers are likely to produce.
As shown on the Waterfall Chart below, this figure is made up of the first two contributors:
- Current Customer Base ($15M)
- Customer Retention Loss (-1.5M)
Don’t miss accounting for retention loss. For some companies this is a small impact, but for others the nature of their Customer Life Cycle can result in notable and unavoidable loss. In either case, it’s important to recognize the net effect of what is reasonable to expect from your base revenue.
Step 2: Current Customer Organic Growth
Next, it’s time to project what is expected from your current accounts in terms of organic growth. This is in addition to base revenue anticipated year-over-year from these same accounts.
As shown on the Waterfall Chart above, this figure is represented as the third contributor:
- Current Account Growth ($2.1M)
While this growth contributor is organic, it requires strategic planning, implementation, and execution to bring into reality. Expanding growth from existing customers tends to be low hanging fruit in most organizations.
I routinely find untapped opportunity in this segment due to lack of sales focus on how to expand wallet share through strategic account planning, quarterly business reviews (QBRs), etc. The real missing link is often the absence of effective sales leadership focus.
In the small and mid-sized business sectors, this is commonly due to the owner or top executive filling the sales leader role in addition to their own. This results in them not having ample bandwidth to oversee the sales department with the diligence it requires.
This common scenario was one of the driving factors for why I transitioned my VP Sales career into a Fractional VP Sales practice. I can help you fill your Sales Leadership coverage gap to reap big ROI impact!
Step 3: New Logo Growth
Now comes the layering of New Logo or Net New growth. As shown on the Waterfall Chart above, this figure is represented as the fourth contributor:
- Net New Accounts ($2M)
One of the first things you must consider is the history and current state of your market.
You can’t expect to land twice as many accounts if they don’t exist. Just like you can’t expect your industry to heat up and out-pace the rest of the economy.
If you already have an established Marketing Funnel methodology running that has proven its ability to generate steady lead flow, your Net New calculation tends to be easy to derive.
If you don’t, it is imperative that you develop a cohesive partnership between your sales and marketing functions to generate effective lead generation results that can feed your sales pipeline.
You’ll find helpful guidance on how to integrate your sales and marketing functions by accessing my previous blog entitled, “How Do I Engage Sales in Lead Generation?“.
Step 4: Strategic Growth Initiatives
The last factor to build into your revenue growth planning equation is various supplemental strategic growth initiatives. These serve as the stop-gap between what executives are resolved to achieve for their growth trajectory and what is reasonable based on the current state of their sales and marketing teams’ performance.
As shown as the last two contributors on our Waterfall Chart above, we listed the following as examples of additive growth initiatives:
- New Product or Service ($1.2M)
- Business Acquisition ($3.2M)
Take some time to think about your own product or service offerings and any new solutions you plan on launching. How much capacity or inventory will you have available? How steep is the barrier to entry for new solutions you’re bringing to market? How do your new offerings stack up against competitive options?
The answers to these questions will guide how conservative or aggressive you apply these growth contributors to your revenue planning calculation.
Other tactics may be strategies you deploy that impact pricing or deal size by asking yourself a series of questions such as… Do you need to raise or lower prices? Do you plan on adding a new offer that you anticipate will increase the amount you expect to sell? What are your competitors doing to take market share?
After all the above strategies are exhausted, that’s when an acquisition may need to be considered. Addressing acquisition planning calls for an article of its own, so I’ll leave it as a high-level and worthy consideration when additional growth trajectory is needed.
A Revenue Goal You Can Trust
Remember, Bottom-up and not Top-down when establishing your new fiscal year revenue goals. Even though it takes some time and hard work to arrive at a logic-driven number, it pays dividends!
Business leaders have renewed confidence, your teams are on solid footing to create proactive plans, and everyone is rowing in the same direction. This momentum along with strong sales leadership execution is critical in positioning your company for success in the new year.
If you are finding yourself questioning the strength of your sales pipeline and wondering why projections seldom line up with your actual revenue, please feel welcome to reach out. You may contact me through any of these methods: (404) 271-6767 or [email protected] or book a call through my Scheduling Tool.
Dan Mahony
President
I am part of a national group of Senior Sales Leaders who collaborate to share insights like the examples shown in this article. We formed because of our shared passion to help business leaders exponentially grow their revenue.
