How do Businesses Increase Revenue?

In this article, I discuss how businesses, generally, improve revenues. There's two other things you should know however.

First, your business might do better by focusing on other metrics. A common scenario in business is focusing on revenue growth over items such as return on equity (ROE). For example, there are various numbers thrown out but its clear that most M&A transactions are value destroying (a number of reasons for that, but likely overestimated synergy and underestimated dis-synergy). This means the ROE is lower than the cost of equity. In other words, revenue goes up, but you earn less than you paid. Being able to discern the correct metrics to focus on is very important and growth isn't always a great option.

Second, you should understand the specific revenue drivers of your industry. Our team will probably produce a 'main revenue drivers by industry' list in the future that you can view but aside from paid resources like trade publications, you can also find this information for free in company's 10-K reporting (for publicly traded companies). Generally, there are top-down (macroeconomic, industry, etc) and bottom-up (product line, supply chain, etc) drivers of revenue. You should understand top-down drivers for predictive and positioning purposes but business owners have much more control over bottom-up drivers.

So, how do you increase revenue?

All good answers, start with asking better questions. Let's say you have a product business. How you obtain revenues is kind of obvious: Revenues (single product) = Number Sold x Price. Straightforward. Obviously if you want to increase revenue, you need to increase the number you sell or the price (or the number of products). Breaking down price components is a little more complicated and include economic concepts such as price elasticity and differentiation, so let's look at number sold.

Fundamentally, you need to look more closely at the way sales are made; You look at your product line, you separate it by geography, then by channel. So now you're looking at how you sell in Wisconsin in store. You break it down by store and find a location where you're not currently distributing product. You check to see if people will buy your product there, then you call the store to negotiate a deal, now more of your base is exposed to your product. Easy. The point of this first exercise is to analyze your sales channels by parts and identify areas of opportunity.

Aside from breaking down product lines further, we could also launch a new product, or, more generally, a new revenue model. For example, you have a product line that uses a certain common distribution center. If you could buy the distribution center, you can charge for usage of the distribution center, creating a new revenue model. When making lateral moves, I suggest thinking about the synergies between the new components: Will my old customers buy this product as well? Can I cross-sell in this market and obtain new customers for my other products? If I buy this distribution channel, will I benefit from reduced SG&A costs? Think about all the moving parts and how they work together. Don't just expand.

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