Imagine for just a moment that your business risks vanished into thin air. Economic uncertainty, competition, government regulation, product obsolescence, customer churn. Gone! You’re 100% risk-free! Produce whatever you want, whenever you want, and sell what you want, all for a tidy profit! No worries. Ahhhhh, bliss! Before letting go of the fantasy, think of the costly operational fat and unneeded projects you can now jettison.
Lead generation, sales training, trade shows, promotions, price discounting, customer relationship management systems, advertising, public relations, loyalty programs, social media campaigns, content development, webinars, brand management, predictive analytics, market research, marketing automation, search engine optimization, buyer persona development, use-case analysis, supply-chain logistics. –Heave ho!
As utopian as this sounds, there’s a downside. Without risk, almost everyone reading this blog would not have a job. Revenue guaranteed into perpetuity obviates any need for CMO’s, CCO’s, CSO’s, or anyone else tasked with business development. No need for concern, though. As much as we dislike uncertainty, we all operate under the same permanent cloud, namely, there might not be sufficient demand for what our companies plan to profitably produce. This situation, which I call RAR, or Revenue at Risk, sustains the careers of millions of knowledge workers, not just in sales.
Revenue at Risk gives sales funnels their taper, lead pipelines their multipliers, and sales forecasts their probabilities. Yet, the concept baffles nearly everyone. According to a recent CSO Insights survey, executives responded that the win rate for forecast deals was 46.5%. As Jim Dickie, the company’s managing partner observed, people have better chances of winning at roulette.
The low win-rate could be improved with better risk management. Unfortunately, for many executives, risk just looks like one big amorphous blob onto which they spray project money, hoping problems will shrivel to a less-intimidating size. The Sales VP says there are too few leads in the pipeline? Stoke up the lead-gen campaigns! Revenue didn’t make plan last quarter? Increase the pipeline multiplier! Such tactics can reduce risk, but don’t often tackle the ones that create the greatest impact.
Taming RAR requires examining its four components:
Revenue At Risk = (unpaid or underpaid revenue) + (future revenue lost due to customer churn) + (pipeline leakage) + (revenue from unrecognized opportunities).
• Unpaid or underpaid revenue. Not all revenue that’s invoiced gets paid. Some companies manage this through requiring prepayment for products and services. Amounts that are uncollected are tracked through a budgeted allowance account in the General Ledger.
• Future revenue lost due to customer churn. Many companies recognize that a percentage of accounts will not remain customers. The amount of Revenue at Risk can be estimated based on the expected attrition rate times the expected revenue per customer.
• Pipeline leakage. Everything that spills out of the traditional sales funnel. Unqualified, uninterested, undesirable, unmotivated, unknowledgeable, lost to competitors. The list goes on. Where most companies concentrate time and effort.
• Revenue from unrecognized opportunities. Revenue from prospects who would be perfectly happy buying from you, if only they knew you existed. Or put another way, revenue from prospects who would be perfectly happy buying from you if only you knew they existed. Quite hard to measure.
Which risks should be managed, and how much attention must be devoted? The answer depends on who judges the risk. According to Paul Slovic, a psychology professor at the University of Oregon, and a leading expert in risk perception,
‘Risk’ does not exist ‘out there,’ independent of our minds and culture, waiting to be measured. Human beings have invented the concept of ‘risk’ to help them understand and cope with the dangers and uncertainties of life. Although these dangers are real, there is no such thing as ‘real risk’ or ‘objective risk.’
Still, if you’re like me, and appreciate guidelines and topographic maps, Part 2 in this series, How to Perform a Revenue Risk Audit Without Even Crying, will offer a checklist for uncovering how risky your revenue forecasts are. Part 3, Risk. What Happens When You Aren’t Getting Enough?, will address how companies use risk capacity for competitive advantage. And Part 4, Do You Know What Your Revenue Risks are Costing You? will discuss the how efficiently your business development expenses are addressing your revenue risks.
How menacing is your RAR? Add up the numbers – before you send them to procurement, product planning, and finance.