What is Customer Revenue and How to Optimize It?
In this blog, let us understand what is customer revenue and what are the different ways through which it can be generated.
Most of the businesses have multiple sources of revenue that they generate. Few of the revenues come from their core services and products and are called operational revenue. Other revenues are called non-operational revenues that come from sources like interest or dividends. But out of all the revenues, the most common and primary source of revenue is the customer revenue.
Customers are the backbone of any modern business. They can lead your business to the greater heights if you know how to leverage their participation. Customers invest in your services and products at various stages of their customer journey.
Gone are the days when the customer relationship used to terminate after the one-off purchase. Now businesses have various opportunities that can be used towards generating customer revenue. Customers’ preferences have also expanded from the core product to the vast parameters that define their relationship with the brand. And customer experience is one such parameter that we have covered in many of our blogs.
But for now, let’s understand customer revenue and the different ways through which it can be generated.
Out of all the revenues that a business generates, customer revenue is the revenue that is generated by the customers. These revenue can be in the form of one-time sales or the recurring revenue. The overall revenue they generate over their entire customer journey is attributed to most of the business growth.
These revenue can be in the form of any revenue that can be referred to as reportable annual GAAP revenue, Annual recurring revenue, or even Customer Lifetime Value.
When it comes to recurring revenue, it is not just the subscription renewal revenues that is counted. As the customers’ needs evolve, they purchase more items from a business. These transactions can be upgrades or cross-buying relevant products. They may sound like a one-time purchase but the customer needs are ever-evolving. And so are the products that a company offers.
So, all these purchases that a customer makes during their entire lifetime with a business add up to the overall revenue they generate for a business.
When you are looking to grow your revenues to drive business growth, there are certain metrics you should be tracking. These metrics help you analyze your cost parameters and give you a clear picture of how and where you should be investing to drive future growth. Few of these metrics are:
There is no point in generating revenue if most of it is going towards acquiring new customers. For maximum profitability, you should know how much you are investing towards customer acquisition cost. This would help you decide the overall budget that you can afford to spend while keeping your business profitable in the longer run.
CLV is an estimated overall revenue a customer would generate in their entire relationship with a business. This estimate is arrived at based on the first purchase, recurring revenue and various upsells and cross-sells revenues that a customer generates for a company. Knowing this metric is very important for creating business strategies as well as valuation of a business.
This is a metric that gives a clear picture of how much a customer is worth after considering all the revenues they generate and the cost behind acquiring them. It is calculated simply by subtracting Customer acquisition cost from Customer Lifetime Value. For a more precise measurement, few companies also subtract the customer service cost.
To optimize customer revenue, you have to do a strategic management of pricing, inventory, demand and distribution channels. With an increased understanding of consumer behavior, companies are in a better position to leverage customer information.
Any information that a customer leaves during the interaction with the company can be used to assess how they can influence consumer behavior to spend more on their products. Various factors are involved in maximizing the revenue which are mentioned below.
Revenue optimization is not just the responsibility of the sales team anymore. Customer success has taken over a vast majority of business as they shifted to a subscription based model. All the departments have to function well towards helping the customers achieve their goals. The over customer experience that is generated through every interaction counts a lot in influencing customer’s buying decisions.
With digital services, companies have no limit to which they can reach out to new customers. Sales process must make extensive use of technology to understand consumer behavior. Customer segmentation helps a lot in creating strategies to engage effectively with a personalized experience. But there has to be an equal weightage to the manual interaction as well to develop trust, especially when the prospect is near the end of the sales funnel.
Forecasting future demands based on past performance is another strategy that can help customer revenue optimization. Based on the prediction of the business that a company would generate, they can manage their resources and budget in advance to meet those demands. There are many business forecasting tools and techniques that a company can use towards this end.
Making an omnichannel presence to market your product is one of the most effective strategies. There are various options to market your product. They range from paid ads like Google ads, Facebook ads, Display ads, etc. to inbound marketing strategies like content marketing. Inbound marketing helps you stand apart from your competitors as an industry expert.
Sales department has enlarged its expanse to various other departments over the past few years. The whole organization has to become customer-centric and understand their potential contribution towards reaping more business. Customer acquisition is no doubt necessary to start with. But what matters most is how effectively you are able to retain them to reap more benefits over the long term.
Customer revenue generation has many forms and attributes. Even the customer service revenue adds up to your overall profit if you give an outstanding experience to your customer. The lifetime revenue brings in a vast difference in your business valuation. If you are able to save your churned revenue and serve your customers well, the revenue generation would grow massively over a long period due to compounding effects.
Originally Published November 12th, 2020, Updated November 12th, 2020
Shoeb lives and breathes Customer Success and SaaS. He has a passion to research on the latest innovations happening in SaaS and Customer Success. Shoeb hails from a Software Architecture background where he worked for many years with Indian Tech Giants like Wipro and ITC building software solutions for their MNC clients in the UK and Denmark.