Revenue Drivers

What are Revenue Drivers?

Revenue drivers are direct inputs — products, services, activities, strategies, and markets — that generate revenue for a business. Anything a company does to increase its top-line revenue can be considered a revenue driver.

The core purpose of any business is to turn a profit — on a macro level, its revenue drivers are the means to that end. To capture the impact of a particular revenue driver, businesses use key performance indicators (KPIs) like sales volume, market share, conversion rate, and growth rate.

By measuring these KPIs, businesses can understand how each source of revenue is performing and what changes need to be made for greater success. To fully understand the profitability of each revenue driver, they would then look at its cost drivers (i.e., factors contributing to cost of goods sold, overhead expenses, and marketing costs).

In short: Revenue drivers are a business’s core sources of income. They’re the inputs and variables that form the base of a revenue model.

Synonyms

• Business drivers
• Revenue growth drivers
• Sales drivers

The Importance of Revenue Drivers in Financial Modeling

Managers, executives, and investors use financial modeling to forecast the performance of a business unit, team, or project. It helps the, plan for the future by looking at past and present financial data.

Since drivers are the direct factors contributing to its revenue growth, they are essential in this process.

Different Revenue Models

A business’s overarching revenue model usually falls into one of three categories: subscription-based, advertising, or product/goods (transaction-based).

• Advertising: Companies generate revenue by showing ads on their websites or apps. Key revenue drivers for the advertising model include the number of ad impressions, click-through rates, and cost per click.
• Subscription: Customers pay a recurring (monthly or annual) fee for access to a product or service. The primary revenue drivers in subscription businesses are the number of subscribers, customer retention rate, and average subscription price.
• Transaction-based: Businesses generate income through individual transactions, such as one-time projects or ecommerce product sales. Important revenue drivers for this model include the number of total transactions, average transaction value, and conversion rate.

How a business structures its revenue model largely depends on the industry it operates in — that said, most use more than one model to accommodate multiple revenue streams.

Using Financial Models to Understand Revenue Drivers

Businesses rely on accurate revenue forecasting for strategic planning. To do it well, they need to understand the different dynamics at play.

Suppose a B2B manufacturer for swimwear brands sees seasonal fluctuations in revenue — in the summer, they grow revenue by 20% to 30% YoY, yet starting in October, they experience a decline.

In this case, pointing out seasonality is fairly obvious (more people purchase swimwear in the spring and summer months). But it is non-prescriptive, which defeats the purpose of a financial model.

That’s why it is essential to define the underlying revenue drivers and understand how they contribute to a company’s performance. Why does revenue decline in October — is there a change in customer demand or a shift in the competitive market? Or was there also a problem with the internal sales process?

Understanding the answers to these questions helps the organization take action to capitalize on future revenue sources more effectively.

Testing Different Drivers for Potential Efficacy

To correctly evaluate the impact of each driver, businesses must identify, test, and track KPIs. In the above example, that could include:

• Testing different marketing drivers to find the ones that resonate best with customers
• Tracking the number of transactions and average transaction value to see if they are affected by seasonality
• Monitoring customer retention rate and churn rate to identify any potential drop-off in loyalty
• Looking at the acquisition funnel to determine if any points of friction are preventing customers from converting

That way, instead of saying:

“We grew revenue by 30% YoY.”

Analysts can say:

“We grew revenue 30% since last summer, and we can do X, Y, and Z to grow it by 40% this upcoming summer.”

Key Revenue Driver Examples

Since they encompass so many different parts of a company’s business model, there are numerous types of revenue drivers. Most can be grouped into five categories: operations-led, marketing-led, pricing, leads, and sales-led revenue drivers.

Operations-Led Revenue Drivers

Operations-led revenue drivers are activities or processes that contribute to revenue generation through internal efficiencies.

Operational Efficiency

Creating a more fluid operation is one of the best ways to drive revenue because it also makes that revenue stretch further within the company (i.e., it increases profitability).

Revenue drivers for operational efficiency could be:

• Utilizing automation and artificial intelligence to reduce manual labor
• Streamlining order management processes to increase efficiency
• Enhancing customer service through faster response and resolution times

The idea behind operational efficiency revenue drivers is they lead to higher sales volumes, not just a more favorable profit margin.

For instance, customer service efficiency could improve customer satisfaction. This, in turn, increases the lifetime value of a customer, causing them to spend more over time.

Supply Chain

Inventory procurement, order fulfillment, and shipping are all essential parts of the supply chain. The more efficient these processes run, the smaller the costs associated with them — which then translates to increased profitability.

A supply chain revenue driver might be:

• Automating purchase orders to reduce manual data entry
• Negotiating better terms with suppliers to lower material costs
• Working with third-party logistics companies (3PLs) near major markets for faster shipping

Similar to operational efficiency, these do more than just reduce cost drivers — they improve the customer experience and help customers sell more.

New Product Development

The engineer-to-order process starts with product development. New products or innovations can capture more of the market and drive revenue.

For example, a company might:

• Improve existing product lines to add additional features
• Launch new products that target different customer segments
• Develop customized solutions for specific customers in their industry

Companies relying on product-led growth rely heavily on development as a key revenue driver.

Marketing-Led Revenue Drivers

Marketing drivers are activities or processes that increase awareness of a product or service to drive sales. They include:

• Advertising: Running digital ads, TV campaigns, or out of home campaigns to reach a larger audience
• Social media presence: Building brand awareness and connecting with potential customers
• Content creation: Creating original content like blog posts, videos, infographics, and podcasts that educate and engage the audience
• SEO: Creating the same content as above but with the additional goal of performing well in search engine rankings
• Email marketing: Targeting potential and existing customers with drip campaigns, newsletters, and promotions
• Promotional campaigns: Discounts, giveaways, and incentives

Marketing-led revenue drivers are important because they’re scalable and companies can A/B test them. Unlike many other types of revenue drivers, which take time to implement, marketers can answer questions like:

“What if we changed this ad image? Would it drive more clicks?”

Or:

“How would Target Audience X react to this campaign vs. Target Audience Y?”

And they can answer them far more quickly than other departments.

To gauge the efficacy of marketing revenue sources, businesses must track metrics like media impressions, lead quality, conversation rates, and customer acquisition costs.

Pricing Strategy

Assuming a solid product-market fit, companies can drive additional revenue and differentiate their products through price optimization.

Pricing drivers are an important revenue source because they affect both the quantity and quality of sales. A company might increase the price of a product to capture more margin, for example — or lower it to gain market share.

Examples of pricing drivers could include:

• Loyalty programs
• Tiered pricing structures
• Volume discounts
• Subscription and recurring revenue models
• Dynamic pricing (e.g., Uber’s surge fees)
• Loss leader pricing

When utilizing pricing strategies, companies need to keep customer psychology in mind — how much are they willing to pay for the product or service, and what makes them more likely to convert?

To actually gauge the success of a pricing strategy takes more time and experimentation than other types of revenue drivers because customers must actually purchase the product or service.

Leads and Referrals

Before someone is a customer, they are a lead. Leads come from product, pricing, marketing, and sales drivers (or, they could be referrals).

Leads can come from:

• Word of mouth (e.g., customer referrals, brand evangelists)
• Events and webinars
• Inbound marketing (SEO, advertising, etc.)
• Outbound email campaigns

To maximize the potential of leads and referrals, organizations need to focus on lead nurturing and qualification. When both these processes are well-executed, revenue growth happens through higher sales volumes and increased customer retention.

Sales-Led Revenue Drivers

Sales-led drivers, like marketing, are core revenue sources for many companies. Without sales drivers, the only way to really build a customer base would be through marketing.

Pipeline

In B2B, the sales pipeline is where it all goes down — this is the process through which organizations generate revenue. A successful pipeline typically contains these main steps:

1. Lead qualification. A sales team member evaluates leads from referrals, inbound marketing, cold outreach, and other sources to determine their viability.
2. Sales demo. This is where sales personnel meet with the customer to discuss their needs and present possible solutions.
3. Proposal/quote. Once the customer has expressed interest, a sales team member crafts a proposal or quote.
4. Negotiation. Sales representatives go back-and-forth with potential customers to get buy-in from each and refine terms of the deal.
5. Closing. After the customer has agreed to purchase, a sales team member finalizes the terms and closes the deal.

Sales managers track metrics like number of leads, close rate, deal size, average sales cycle time, to understand the performance of their sales pipeline.

Sales Volume

How much are customers buying?

Companies need to follow their sales volume to understand their revenue drivers. They use it to track trends in customer spending habits, like how often they purchase and what product categories they shop from the most.

Then, they can use it to optimize spending, investment, and sales activities in the areas and product categories that show the highest performance (or room for opportunity).

Recurring Revenue

Recurring revenue is any type of revenue that businesses receive on a recurring (i.e., monthly or yearly) basis. This includes:

• Subscription revenue
• Retainer fees
• Licensing and royalties

Recurring revenue is an important driver because it provides a reliable source of income. It’s also easier to predict cash flow when you know how much money will come in each month or quarter. Plus, it allows businesses to focus on customer satisfaction and retention rather than solely sales numbers.

Customer Retention

Customer retention is a revenue driver because it increases customer lifetime value (CLV) and turns some customers into advocates.

To increase customer retention, businesses should focus on engaging existing customers with things like loyalty programs, promotions, personalized content/emails, and personal support.

Data also plays an important role in customer retention — insights tell businesses about their customers’ behaviors and needs. They use this information to create tailored experiences that encourage customers to remain loyal.

Average Transaction Value

Average transaction value (or average deal size) gives businesses insight into how much a single customer is spending over a given period.

This metric shows companies what products/services are the most profitable and which ones they should focus on marketing more aggressively. It also helps them adjust sales and pricing strategies to maximize profits.

Using Technology to Measure Revenue Drivers

Businesses can’t create accurate financial models or collect and organize data without technology. In the context of revenue drivers, technology includes tools that help businesses streamline their operational processes, understand their customers, track their marketing campaigns, and sell more.

Enterprise Resource Planning (ERP)

ERP systems are designed to help businesses track and manage their finances. They can be used to monitor customer data, optimize pricing models, generate invoices, and analyze accounting records.

It also supports manufacturing and supply chain process, such as forecasting demand, tracking inventory, and allocating resources. Businesses need it to understand product availability, customer demand, and pricing models.

Customer Relationship Management (CRM)

CRM software is the heart of all business operations — it centralizes customer data and acts as a repository for information. It’s used to manage customer relationships, keep track of sales opportunities, and optimize marketing strategies.

They drive pipeline efficiency by tracking deals and keeping conversation notes, help customer success teams improve retention efforts, and show marketers who to target with lead generation campaigns.

Configure, Price, Quote (CPQ)

CPQ software is a revenue driver in and of itself. It automates the quote process and ensures accurate pricing across different channels (e.g., website, retail stores, backend sales).

CPQ software also offers partner portals to help companies increase sales from partners, suppliers, resellers, etc. And it allows customers to customize a product/service to their specific needs before checkout.

Marketing Automation

Marketing automation software puts marketing drivers on autopilot, and it shows companies who’s buying what, when, and why. It also tells marketers which drivers are the most effective and which ones to ditch.

There isn’t a specific “marketing automation” software. Rather, it’s an umbrella term that covers:

• Email marketing
• Social media management
• Content marketing
• Lead scoring and nurturing

It also helps with demand generation by helping businesses create accurate buyer personas, optimize the customer experience, and track their campaigns.

Revenue Management

Revenue management software encompasses all the pieces of a successful sales strategy. It allows businesses to set and adjust prices, track KPIs, forecast demand, and measure different markets so they can adjust accordingly.

It comprises forecasting and intelligence capabilities and helps businesses optimize pricing models, set targets and goals, manage promotion strategies, and keep their books up-to-date.

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