Revenue is a Trailing Indicator

I’ve argued revenue is a trailing indicator for awhile.  This idea is sacrilege to many sales leaders and sales organizations.   Revenue is the key metric in sales. If revenue is up everything is great.  If revenue is down and things aren’t going well, the business needs to be evaluated and changes need to be made.  This part of the revenue equation I agree with.  The problem is, in most cases, when revenue is down it’s too late to do much about it.  The customer base is already defecting at an alarming rate.  Tactical efforts to protect revenue have been exhausted and worse there are no new products to stem the tide.  What I don’t agree with is if revenue is up, everything is great.  This assumption can kill.   Too often we are lulled by the siren of growing revenues and higher margins not realizing the foundation of that revenue and profit is eroding and eroding quickly.   Like a river running under the foundation of a house.  Everything seems great on the surface, but it’s just a matter of time.

Michael Mace at Mobile Opportunity has done an impressive analysis on Blackberry and why they are in trouble in spite of record revenues and profits.  His position supports what I’ve argued for years.   Revenue is a trailing indicator.  Go read it, it’s absolutely worth it.

For years we have measured revenue to determine the health of business.  The problem with this approach is revenue masks many problems until its too late.   Revenue rarely provides a forward looking view.  Revenue does little to capture current customer satisfaction, product innovation in the market or new customer acquisition rates.  Not only does revenue not capture or highlight these critical business metrics, in many cases it masks them driving companies to falsely assume they are doing well.  If revenues are up, customers MUST be happy.  If revenue is up we MUST have strong market positioning.  If revenues are up we MUST be gaining new customers.   When revenue is up, the only thing you know is . . . revenue is up.

I believe in running business on leading indicators.   Finding metrics in your business that tell you what is going to happen and not what has happened.  Metrics like new customer growth, customer satisfaction, new product innovation, ARPU (average revenue per user), customer acquisition costs, churn etc all give me a better understanding of where my business is headed.

At the end of the day, business isn’t about revenue.  It’s about your customers and your products.  Identifying metrics that give you insight into what your customers are doing and where your products stand in the market will be far more predictive than revenue.

Don’t get me wrong, measuring revenue is important.  Using it as a predictive metric is where it can get you in trouble.

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