A number of key performance measures can provide insight into historical trends and future revenue potential.
Sales Growth: Sequential and Year-over-Year
A critical measure of business performance is simply to measure the rate of growth in sales from one period to another. Table 6.5 illustrates a typical presentation of sales growth rates. Two different measures are frequently used. The first is simply to compute the growth from the previous year. The second measure computes sequential growth rates, that is, from one quar- ter to another.
While these growth rate measures are important top-level performance measures, they are of limited usefulness without additional analysis. Some TABLE 6.5 Quarterly Sales Trend ($ Millions)
Year Year
Q104 Q204 Q304 Q404 2004 Q105 Q205 Q305 Q405 2005
Sales 62 64 60 75 261 65 70 58 82 275
Year-over- Year
Growth 5.1% 6.7% 11.1% 8.7% 7.9% 4.8% 9.4% –3.3% 9.3% 5.4%
Sequential
Growth –10.1% 3.2% –6.3% 25.0% –13.3% 7.7% –17.1% 41.4%
managers and investors will extrapolate past sales growth rates into the fu- ture. This works in certain circumstances for a period of time; however, it does not take into consideration the underlying dynamics that will drive future revenues. These factors include market forces, competitive position, innovation, and customer satisfaction.
Customer/Competitor Growth Index
The evaluation of a company’s performance is best done in the context of competitor, customer, and overall market performance. This is very impor- tant in assessing a company’s performance in growing sales. For example, if Simple Co. grew 8 percent last year, the market grew by 3 percent, and one of the competitors grew 25 percent, would we consider this acceptable performance?
Comparing growth to rates experienced by key competitors and cus- tomers places the company’s performance in an appropriate context. It can also be important input to strategic analysis. For example, what are the causes and implications of customer growth exceeding our own? Are we missing potential opportunities to grow with our customers? A summary of comparative growth rates is provided in Figure 6.4. In this case, Simple Co. is growing faster than the market, and at a rate between the company’s two largest customers. Simple Co.’s growth rate is ahead of those of two competitors, but is significantly under Fast Co.’s growth rate.
Percentage of Revenue from New Products
Most companies seek to maintain and grow sales by developing and in- troducing new products. An important indicator of the success of the new product development and introduction activities is the percentage
106 LINKING PERFORMANCE AND VALUE
FIGURE 6.4 Year-over-Year Growth
Customers 25%
20%
15%
10%
5%
0%
Growth %
–5%
Simple Co. Goliath Upstart Complex Fast Co. BigandSlo Co.
Competitors
of revenue from products recently introduced. Some companies would de- fine recentlyas two years. Others may shorten the period to reflect shorter product life cycles.
Customer Retention and Lost Customers
Given the cost and difficulty in obtaining new customers, companies must go to great lengths to retain existing customers. Identifying the loss or po- tential loss of a customer on a timely basis provides immediate visibility into the revenue impact of losing that customer and may afford the com- pany an opportunity to take corrective action. Of course, the reason for losing a customer should be understood, contemplated, and acted upon.
Lost Orders
Companies should track the value and number of orders lost to competi- tors. Significant trends may signal some change in the competitive environ- ment. Drilling down into lost orders to identify the root cause can also be enlightening. Most companies expect to lose some orders. For example, a high-end equipment supplier expects to lose some orders to a low-end sup- plier where price is a driving factor in the customer’s buy decision. How- ever, if the company began to lose orders based on performance or service, the alarm should sound.
Revenue from New Customers
Companies may expect future growth by acquiring new customers. In these cases it would be useful to track revenue derived from sales to new cus- tomers. Newis defined by individual circumstance, but is frequently defined as revenue derived from customers acquired over the prior 12 months.
Customer Satisfaction
An important factor in maintaining current sales levels and in growing sales is customer satisfaction. An increasing number of companies periodi- cally solicit overall performance ratings from their customers. Many cus- tomers have sophisticated supply chain processes that include the evaluation of overall vendor performance. These performance ratings are used as a basis for selecting and retaining vendors.
Key elements of the customer’s total experience will include price, quality, delivery performance, and service. Therefore, management should measure these factors frequently. It is important to measure these factors
from the customer’s viewpoint. For example, the customer may measure quality or service levels differently than the supplier. What matters, of course, is only the customer’s perspective.
Past Due Orders
Monitoring the level of past due orders can provide important insight into customer satisfaction. An increase in the level of past due orders may indi- cate a manufacturing or supply problem that resulted in delayed shipments to customers. In addition to tracking (and attacking) the level of past due orders, much can be learned by identifying and addressing recurring causes of past due orders. Reducing the level of past due sales orders will increase sales and customer satisfaction and reduce inventories and costs.
On-Time Delivery
On-time delivery is a very important determiner of customer satisfaction.
Some companies measure delivery to “quoted delivery dates.” Progressive companies measure delivery performance against the date the customer originally requested, since that is the date the customer originally wanted the product.
Quality
Measuring the quality of product and other customer-facing activities is an important indicator of customer satisfaction. Examples include:
product returns, warranty experience, and the volume of sales credits issued.
Projected Revenue in Product Pipeline
If future growth is highly dependent on new product development and in- troduction, then management should have a clear view of the revenue po- tential and project status in each product in the development pipeline.
Table 6.6 is an example of a summary of revenue in the product develop- ment pipeline.
A key benefit to this summary is that development, marketing, sales, and other personnel involved in the introduction of new products have clear visibility to the linkage of their activities relative to future revenue targets. The impact of any delay or acceleration in the development time line on revenue expectations is easily understood.
108 LINKING PERFORMANCE AND VALUE
Revenue per Transaction
Tracking revenue per transaction can provide important insight into sales trends. Is average transaction or order value increasing or decreasing? Can we capture more revenue per order by selling supplies, related products, service agreements, or consumables? In retail industries, revenue per cus- tomer visit is a key revenue driver, and retailers put substantial effort into increasing customers’ spending per visit by offering related products, cross merchandising, and impulse buy displays.
Revenue per Customer
Reviewing the revenue per customer in total and for key customers can identify important trends. Identifying and tracking sales to top cus- tomers is essential to understanding revenue trends and developing fu- ture projections.
Quote Levels
For certain businesses with long purchasing cycles, tracking the level of open quotes over time can be a leading indicator of future revenue TABLE 6.6 Revenue in Product Development Pipeline ($ Millions)
Annual Revenue
Project Name 2005 2006 2007 2008 Potential Status Comment Coyote $ 0 $ 7 $18 $ 24 $ 25 Green On track,
intro 3/06
Fox 0 12 26 30 30 Yellow 2 critical
milestones missed
Rabbit 15 15 15 12 15 Red Technical
performance issues
Tortoise 0 20 30 50 60 Green 1st shipments,
next week
Total $15 $54 $89 $116 $130
levels. Not all quotes are created equal. Some may be for budgetary pur- poses, indicating a long-term purchase horizon. Others may indicate or- der potential in the short term. For this reason, quote levels are often summarized by key characteristics to enhance the insight into potential order flow.
Order Backlog Levels
Some businesses have long lead times or order cycles. Customers must place orders well in advance of requested delivery dates. Examples include aircraft, shipbuilding, and large equipment industries. In these industries, the order backlog levels are an important leading indicator of revenue and general business health.
Anecdotal Input
Nothing beats a customer letter or survey response containing specific feedback. Post them with the quantitative measures and watch the reaction of employees. Many include points actionable by employees at various lev- els in the company. A few examples:
■ “Customer service never answers the phone. Voice mail messages are not returned for several days.”
■ “Service levels have declined. We are contemplating an alternative supplier.”
■ “The delay in scheduling installation and training is unacceptable.”