Sales & Marketing

What’s the Most Important Number for any Company in Assessing Future Success?

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Suppose you’re meeting a CEO for the first time. You only know one fact about the company – that it has customers and is generating revenue. It could be in any industry, anywhere in the world, and any size – a startup or a multibillion multinational. If you could ask the CEO for only one number to assess the future success of his or her business, what number would you ask for? Would you want to know the total addressable market (TAM) it serves? EBITDA? Number of customers? Revenue? Net Promoter Score? How much money the company has raised if it is private? How big its market cap is if it’s public? The number of engineers it employs minus the number of MBAs?

If you could only know one number to gauge the future success of any business, it would be its top-line revenue growth rate. Here’s why:

  1. Growth sets the stage to reward shareholders. It’s hard for any investor to generate a good return if a company isn’t growing.
  2. Growth gives you access to capital, in both private and public markets.
  3. Growth gets potential acquirers to pay attention to you.
  4. Growth gets you noticed. Growth creates buzz.
  5. Growth gives you the ability to attract talent and foster an exciting work environment.
  6. Growth puts your competitors on the defensive and perhaps provokes them to make a mistake or two.

Simply put, top-line revenue growth makes your company relevant; without it, you’re losing market share. No company sustains relevancy without top-line revenue growth.

Who thinks Facebook isn’t worth the $100 billion reported as the company’s planned IPO price? Rory O’Driscoll at Scale Venture Partners makes the case that Facebook might be undervalued if you consider its growth rate. We wholly concur with Rory that high top-line revenue growth should result in a higher proportional market capitalization (or valuation).

Growth is one of those terms people throw out liberally these days. Just Google such terms as “fast growth,” “revenue growth,” “top-line growth,” “business growth,” and “market share growth” and you’ll find hundreds of examples.

At Milestone Group we set out to study top-line growth systemically – across industries, geographies, and irrespective of the stage of company, from startups to multinationals. What we found was quite surprising: three independent variables explain the growth of any business.

1. Awareness

A prospective customer can’t purchase any product or service if they don’t know it even exists, right? Most startups have a significant awareness challenge – their potential customers have never heard of them. Of course, existing companies like Airbus and Boeing don’t have an awareness problem, as it’s a pretty safe bet that if you work for a major airline and your job is to purchase new airplanes you know your only choices for large capacity long-haul aircraft are these two manufacturers. The more awareness of your product or service in the market, the more you can grow.

2. Impedance

How close (or distant) is your product or service from your prospective customers’ expectations? It’s low if your offering meets their expectations, and it’s high if your product or service doesn’t meet their expectations. It’s important to note that customer expectations are not the same as customer wants. Product managers tend to talk about what customers want, but this is actually a misleading line of thought. Wants are different than expectations. For instance, you may want to purchase a new Porsche C4S Cabriolet for $20,000 but you expect to pay $120,000. If you focus on wants, you will most likely have a higher impedance than if you focus on expectations. The closer you are to meeting customer expectations, the more you can grow.

3. Product Interaction Experience (PIE)

How easy/difficult is your product or service to consume post-purchase? There is a post-purchase consumption life cycle for any product that comprises five phases: purchase, discover, use/consume, maintain/support/upgrade and ultimately discard. The goal for a business is to maximize the satisfaction at each phase of the product life cycle. For instance a toothbrush is easy to dispose of, whereas a nuclear power plant is not. PIE is defined as the product of the satisfaction level (from 0 to 100 percent) for each of the five phases multiplied by the weighted importance of each phase. The higher your PIE, the more you can grow.

The strength and uniqueness of this approach is that all three variables are independent. They must all be optimized in order for a business to grow the fastest. Two out of three doesn’t cut it. The growth of any business can thus be best explained if it has high awareness, low impedance, and high PIE. A high number, divided by a low number and multiplied by a high number is a high number, as described by the following formula:

(c) Copyright 2011. Milestone Group.

These variables can each be measured – and benchmarked – against the competition. Take awareness for instance: You score, say, 100 if all the prospects polled in your target segment have heard of your product or service, and you score 0 if no prospects in your target segment are aware of your offering. Notice our emphasis on prospects in your target segment. We’re always amazed when we pass through an airport and see the large multi-colored display ads hanging on the terminal walls. SAP, Oracle, HSBC, Barracuda Networks – the list goes on. All of these companies have high awareness, but how many people passing through Heathrow each day are target prospects in the market for these companies’ products or services? High awareness with your target customer or segment is what really matters.

Here is the key follow-up question to our number-one question: Can the company’s growth be sustained?

High growth? Tick. Sustainable? Tick. Who wouldn’t want to invest?

In other words, if you have a high-growth business and its growth is sustainable, the usual questions about the size of the addressable market, how good the CEO is, competitive threats and managerial competency are much less relevant.

The devil – as always – is in the detail. There are a myriad of reasons companies still get their growth formula wrong. Here are some common mistakes:

  • Not fully embracing the fact that top-line revenue growth is the number-one goal of any shareholder-owned company.
  • Not having a clear view on how fast the market is growing. A lot of executive teams don’t know how fast their markets are growing and how fast they are – or are not – outgrowing the market.
  • Not rigorously segmenting prospective customers. Awareness only matters to those you target. A high degree of awareness with people who aren’t interested in buying is irrelevant and is a waste of scarce marketing budget.
  • Not getting alignment on optimizing awareness, impedance, or PIE. Remember, all three growth variables optimized together are critical to maximizing the growth rate.
  • Not building insanely great products or services. Not coming to grips with the fact that your products may be very average, or worse, below average. Ever hear of the Lake Wobegon effect? This is also driven by a fundamental understanding of why prospects decide to buy (or not).
  • Not embedding growth thinking into everyday business. Instead of being happy with a 30 percent annual growth rate, ask what prevents a 60 percent growth rate. Instead of saying the market you’re in is growing at 50 percent a year, tell us by how much more you’re growing compared to that market (if at all). Instead of saying 95 percent of your customers are satisfied, ask what percent are planning on follow-on purchases in the next 24 months and how much they think they are planning to spend with you.
  • Not focusing enough on PIE. The post-purchase experience is key. Sure, you built something and sold it, but how customers interact with your product or service post-purchase affects your ongoing growth rate. For instance, if the beautifully designed iPhone actually didn’t work well post purchase, it would significantly inhibit sales as word got out among prospective buyers. Apple PIE is amazing.
  • Focusing on the bottom line at the expense of the top line. It’s relatively easy to cut costs, optimize pricing strategies, reengineer distribution, and so on; but it’s a lot harder to inject sustained high top-line growth into any business. Bottom line obsession is a simple Excel spreadsheet exercise and an operational exercise; growing the top line isn’t. A business with decent enough margins but not growing is not relevant. It’s a short-term game.
  • Chasing mirages. Companies hold on too long to illusions of markets that simply don’t exist.
  • Not recognizing and abandoning low growth, uninteresting products and services soon enough. The problem with cash cows in our view is that, too often, the cash part isn’t that interesting. Face it: they’re just cows. Companies often fail to act quickly enough to eliminate below-average products and services.

These are just a few areas where companies struggle with growth; it’s obviously a much longer list.

Remember, the top line is the bottom line and the bottom line is the top line, or to paraphrase Lee Iacocca: If you have a great top line, the bottom line can always be fixed.

Philippe Bouissou, PhD and Mark Zawacki are managing partners at Milestone Group, Inc. Milestone Group is a Silicon Valley based strategy consulting firm obsessed with top line revenue growth. Since 2001, we’ve worked with 200+ TMT clients globally on 400+ successful projects.
We focus on one thing: helping our clients accelerate their top-line revenue growth. Figuring out what’s the best growth strategy going forward for any client takes dedication, experience, perspective, objectivity and candor. We promise we won’t tell you what you want to hear just to curry favor with the goal of follow-on consulting work. Unfiltered, unfettered, unconventional, and un-consulting like.

Comments

By Steve Walters

Excellent. Loved it.

By Leslie Weller

Outstanding article. I have a couple questions. First, what do you mean by the “Discover” phase of the post-purchase life cycle? I would expect “Discover” to be a pre-purchase phase, no?

Second, do you have specific numerical examples for Impedance and PIE you could share?

By Mark Zawacki

Thanks Leslie, great questions.

Regarding ‘discover’, we used that specific word in the context of opening, un-boxing and familiarizing yourself with a newly purchased product/service. We understand the slight confusion the word may cause using it in a post-purchase context and will change for future revs of our model.

Regarding measuring PIE and Impedance. Yes, both can be measured.

First PIE: Easiest way to do this via survey/interview methodology for customers who have used both Product/Service A and Product/Service B. For instance, assign a score of 10 (high) and 1 (low) for each step in PIE, and get customers to rate both A and B. Further, you need to agree weightings for each step as the purchase of a product in most instances should be weighted far lower than say usage, as the purchase experience might take minutes/hours where the usage might be for years.

Second Impedance: Our clients starting to measure impedance start by asking customers many questions. (1) how did you find out about the product? (2) What would you do if you could no longer use the product? (3) What alternatives/substitutes would you use if the product were not available? (4) What is the primary benefit you receive from the product? (5) Have you recommended the product to anyone? If so, how many? (6) What type of person do you think would benefit most from the product? (7) How can the product improve to better meet your needs? The challenge is to then transform the above qualitative questions into quantitative ones, and this score. It’s contextual and specific to each company individually, but can be done!

Hope the above clarifies your questions Leslie. Delighted to follow up further via email if you’d like.

Many thanks.

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