Business needs revenue to survive. What companies do not always consider are internal impacts associated with winning the business. The customisations, the frequent inquiries, the changes from original expectations, the pressured deadlines; all these deviations have costs not easily quantifiable. They cost postponement of projects, reduction in bandwidth, reallocation of development, strains on morale.
At what point is the money simply not worth the money? Who makes that decision?
At first glance, one would be inclined to think Sales since their responsibility lies in winning business. But is that really fair? Does compensation align with the identified selling behaviors that best serve the company? Whether bonuses or commission, how often do we define compensation from a total revenue perspective only? If compensation factored in internal impacts, would that change Sales’ behavior?
I would say yes provided Sales understood internal impacts associated to business opportunities. From here we would ask then, who controls and understands Sales compensation and internal impacts associated with opportunities?
This points beyond management to a role responsible for strategy – usually VP of Sales.
The VP of Sales can create guidelines and then cascade them to Sales. How to determine those guidelines? Let’s consider this example to help visualize the logic behind them:
Take a company with 3M in annual revenue, a current market share of 1%, 20 employees and EBITDA (earnings before interest taxes depreciation and amortization) of 300k. An opportunity arises with revenue of 500k and customization requirements to win the business. Does pursuing this opportunity make sense?
Let’s say the cost of customizations involved a 10% reallocation of company resources for a 3 month period. How about now?
What if those resources were currently allocated to create a significant competitive advantage nine months ahead of schedule. Does the opportunity still make sense?
Let’s assess the value of the opportunity. We can estimate a 10% net profitability from business accrued. That would equate to 50k. What is the impact of an additional 50k? 17% more annual net profit. What is the impact of having a competitive advantage nine months earlier? Well, if the company revenue is 3M which represents 1% market share, that’s differentiation in a market of 300M. How much increase in market share would be needed to account for 500k in revenue? 0.2%. Do I believe significant differentiation could account for 0.2% or higher market share – absolutely! My conclusion, I would pass on the opportunity and instead pursue early access to the competitive advantage in the market.
Keep in mind that all these clarifying questions remain relative to company circumstance. The question remaining constant: “Is the juice worth the squeeze?”