Every business leader wants to unlock the best possible potential revenue for their company. The more revenue you can generate for your brand, the more your organization will grow and thrive. After all, revenue and profit generally go hand-in-hand.
In order to ensure consistent and powerful growth, companies need to ensure they can accurately forecast the revenue potential of each product and service they offer. Knowing how to define the revenue potential of every solution you produce means you can double down on the offerings that deliver the best return on investment.
Let’s take a closer look at revenue potential, and why it’s so important.
What is Revenue Potential? An Introduction
Let’s start with the basics: what is revenue potential?
Simply put, revenue potential is the capability of a specific solution, product, or service to generate profit for your business. Calculating revenue potential, or the potential profit of a solution requires companies to consider the available resources and inventory of a business, and what kind of income it may be able to generate.
Revenue potential often looks at the ongoing revenue of a solution, generated from subscriptions, recurrent payments, and loyal customers.
Not only does this calculation help companies to determine what strategies and solutions they should be investing in, but it can help to build relationships with stakeholders too. Investors can use “potential revenue” to determine whether a company is worth their investment.
For many business leaders, revenue potential forms an important part of the sales pipeline. It offers a way of tracking buyers as they navigate through the various stages of the buying process. Revenue potential also helps companies to create and invest in the right sales strategies.
Why Do Companies Need to Define Potential Revenue?
Calculating revenue potential is important for a number of reasons. It helps companies to measure the current and anticipated performance of each product or service. Some companies also use revenue potential as a guide when selling shares to the public, or even their whole business.
With revenue potential, investors and buyers can more easily distinguish how much a company is potentially worth. Additionally, some lenders offering business loans and similar solutions will require companies to share revenue potential, so they can gain an insight into the stability of the company. Most importantly, revenue potential ensures business leaders can make intelligent decisions about how to grow and strengthen the brand.
Which Metrics are Crucial for Calculating Revenue Potential?
Defining revenue potential requires business leaders to examine a number of crucial metrics and business analytics. While the exact calculations used by each business may vary, the most common metrics included in calculating potential revenue are:
- Monthly recurring revenue: MRR, or monthly recurring revenue offers an insight into the income the company is already earning through various products and solutions.
- Committed monthly recurring revenue: CMRR looks at the revenue specifically coming from payment plans and subscription models, where customers have “committed” to making a purchase for a set period of time.
- Average revenue per customer: The average revenue per customer in a business predicts how much revenue each potential client can bring into the company within a certain period of time. Companies can also look at the potential “lifetime value” for each customer.
How to Estimate Revenue Potential
Understanding the revenue opportunity available to your business starts with careful evaluation. To set the right goals, and understand the potential of the business, companies first need to determine which metrics they’re going to monitor, such as average revenue per customer, or monthly recurring revenue. From there, the business leaders will need to:
- Calculate monthly recurring revenue: Add up the amount of revenue generated from recurring revenue on a regular basis. The formula for monthly recurring revenue is simply: average monthly subscription (or purchase amount) multiplied by the total number of customers.
- Examine committed monthly recurring revenue: Alongside current monthly recurring revenue, companies may also need to examine the amount of revenue they’re set to receive from committed customers. To calculate this, you’ll need to look at your monthly recurring revenue, plus signed contracts, minus any expected turnover or customer churn.
- Explore average revenue per customer: Next, you’ll need to examine the average revenue you can access per customer. The easiest way to find your average revenue per customer is to divide the total expected revenue for a period by the number of customers you serve.
- Analyze the data: After completing the key calculations for each of your metrics, it’s time to evaluate your opportunities. Compare the results of your calculations with benchmarks from your industry to determine the success and potential profit of the company.
How to Unlock More Revenue Potential
Calculating revenue potential doesn’t just give businesses a way to attract potential investors and examine business growth. It can also be an excellent insight into the steps companies need to take to improve their chances of future revenue. You can increase potential profit by:
- Looking for hidden opportunities: Examine the market and search for potential sources of revenue and hidden opportunities you may not be taking advantage of yet. Look at where your competitors are increasing their profit and examine the opportunities for your brand.
- Double-down on profitable products: Examine the revenue potential of each of the products and solutions individually. This way, you can more easily see which strategies are most likely to generate the best income for your business.
- Eliminate non-profitable strategies: If the revenue potential for certain products and services is too low, you might look into different revenue opportunities instead. Adjusting your sales and marketing strategies based on what you know about the revenue potential of each solution can significantly reduce your chances of wasting budget.
- Set goals: Use your revenue potential to forecast your potential sales opportunities and write more effective OKRs for your team. You can document your revenue potential and data over time to determine whether you’re achieving your goals and unlocking new opportunities.
If you’re struggling to make the most of your revenue potential, one of the easiest options may be to consider working with a professional team to assist you. Companies like Nimchinski Michael are dedicated to helping brands make the most of their profit potential. Get in touch today to find out what they can do for your brand.
