Scaling the Revenue Engine — Chapter 1: Revenue Engine Overview
Only 0.14 percent of the 60,000 software companies that received funding in the past decade have become unicorns (companies worth $1 billion or more).¹ Thirty percent of these lost their entire invested capital, and 70 percent failed to achieve projected ROI (in other words, they had an unsuccessful exit).² An article published in the Harvard Business Review noted that that 62 out of 100 venture capital (VC) funds the Kauffman Foundation invested in over 20 years failed to beat a small cap public index.³
For the founding tech company CEO or senior executive, whose common shares sit under the VC’s preferred shares, these statistics are crushing. Over the years, too many founders and senior execs have poured their sweat and struggle into companies that yielded little or no equity outcome.
If you are a VC-backed tech company CEO, you are highly motivated to beat the odds.
Valuation is tied to revenue growth. In most companies, the only path to a financially successful exit for CEOs and their teams is through rapid revenue acceleration. It is on behalf of tech startup CEOs — and to aid in their pursuit of rapid revenue acceleration — that I wrote this book.
The prevailing framework for revenue generation treats marketing, sales, customer success, and finance as separate domains with separate accountabilities and arm’s length handoffs. Success in this model hinges on hiring experienced domain experts at the top of each function and expecting cross-functional executive cooperation in driving revenue generation activity.
But, after two years of in-depth research into the revenue generation practices of a diverse array of early and mid-stage tech companies, along with a review of the secondary research and the inputs of world-class marketing and sales practitioners, a different framework emerges.
Revenue generation is achieved through coordinated activity across the enterprise. This begins with a clearly defined strategy and results in finely tuned acts of daily customer engagement along the entire prospect and customer journey.
Coordination must occur not just with top executives, but with managers and front line employees too — particularly at the cross-functional hand off points. The sum of all the strategies, plans, people, tools, workflows, and metrics that create this coordinated revenue generation activity is what I call the “revenue engine.”
Best practice revenue engines are built as whole systems, bounded by unit economics, with end-to-end workflows and data flows that support and orchestrate customer engagement. These metrics are tracked at every step and optimized via continuous improvement projects.
The revenue engine’s purpose is to maximize repeatable, scalable, ROI-positive revenue and profit growth. You drive ROI by maximizing your customer lifetime value (LTV) and minimizing customer acquisition cost (CAC). You drive growth by optimizing your pursuit of prospects and expansion spending from current customers, working within CAC boundaries.
Before we go further, it’s worth examining what we mean by “business model.” We tend to think of business models in terms of “media,” or “marketplace,” or “e-commerce,” or “B2C SaaS,” or “B2B SaaS (SMB / mid-market / enterprise).” But such descriptions leave opaque the key variable that differentiates them. At least for revenue engine purposes, a clearer way to describe business model is in reference to LTV:
- Very Low Customer LTV (<$500)
- Low Customer LTV ($501 — $10,000)
- Mid Customer LTV ($10,001 — $100,000)
- High Customer LTV ($100,001 — $500,000)
- Very High Customer LTV ($500,001+)
Using this approach, most media, marketplace, e-commerce and B2C SaaS businesses fit into the Very Low Customer LTV business model. Here, the scaling path is via online demand generation (e.g., SEO, SEM, digital marketing, viral social effects). A B2B SaaS company serving SMB customers, on the other hand, would likely fit into the Low Customer LTV business model, and may combine online demand generation with a high-velocity call center for fulfillment.
With the Very Large Customer LTV business model, a complex sales process, high-priced sales executives and multi-dimensional account based marketing initiatives prevail. As LTV grows, an expanding array of customer acquisition and expansion levers becomes viable.
The point is that revenue engine strategy must start with the math of the business. Customer LTV is the grand arbiter. In order to scale, it is generally recognized that the ratio of LTV / CAC should be 3 or greater, with CAC payback less than 18 months. This boundary condition establishes the revenue generation options available, given your business model:
The path to scaling revenue, then, is to move from highest-ROI customer acquisition tactics, to the next highest-ROI tactics, to the next, always exhausting the potential of each tactic before moving on. You keep adding tactics until the ROI pushes up against the LTV / CAC boundary. As you add these new tactics, you simultaneously work to further optimize the performance of existing ones.
Each component of the revenue engine must deliver peak performance for the other components to function properly. They all work together to efficiently and effectively carry the right buyers and users through the prospect and customer journey, from initial awareness through initial sale, launch and expansion.
The performance of your revenue engine depends on two factors: its design and its implementation. What engine have you designed? A Porsche or a Yugo? Even if it’s a Porsche — thoughtfully and carefully designed — have you kept it oiled, fit, and trim? Are you using the highest-performing fuel?
The Revenue Engine Framework
The revenue engine starts with what we call the “Bow Tie” — the graphic part of the revenue engine framework shown above that looks like a traditional bow tie. The customer engagement journey starts at Top of Funnel, then continues through Mid Funnel, and then to Bottom Funnel, leading to Closed Won, the “knot” on the Bow Tie. Subsequently, the journey continues on to Launch, Stabilize and Expand domains.
Sitting beneath the Bow Tie are four foundational layers. The base layer is Mission / Strategy, comprised of:
- Mission, vision, and values
- Customer segmentation
- Value proposition
- Competitive positioning
- Brand identity
- Pricing and packaging
- Prospect and customer journey
- Channel architecture
Sitting above Mission / Strategy are three more foundational layers: “Unit Economics / Financial Plan,” “Tools / Information Architecture,” and “Messaging Schema.”
These four foundational layers are the building blocks that support all the customer engagement activity that occurs along the Bow Tie. The Bow Tie customer engagement activity is performed by functions (product marketing, growth marketing, sales, and customer success) that coordinate people, tools, workflows, and metrics to accomplish the job.
Regardless of your business model, the revenue engine’s core components are consistent. The B2C E-commerce site’s customer traverses the Bow Tie in the same sequence as does the B2B SaaS enterprise customer. No matter the business model, the imperative is to design and implement an engine that is fit, trim, constantly measured, and continuously improving.
The Foundational Layers
To make your revenue engine perform like a Porsche, you first need to attend to the engine’s foundational layers. Let’s go through each, working from the bottom up.
Mission / Strategy Layer
Mission, Vision, and Values:
These comprise your essential canon, your “north star,” which guides purpose, end in mind, and norms. Without clarity here, you don’t even know if you’re cutting a path through the right forest.
Segmentation is vital. It’s the starting point for the entire revenue engine. Done well, you will have a tight definition of the specific attributes of your target market and ideal customer profile (ICP).
For each top priority segment, you will know the buyer and user personas, the specific needs and pain points addressed, and the pricing demand curve. These, of course, will evolve over time, so it makes sense for you to regularly reassess your segmentation research.
Your value proposition defines the core functional value attributes that strongly resonate to your top priority segments, and that you can claim as unique.
Competitive positioning accentuates the value drivers that resonate for your top priority segments. You call out those attributes for which you have a strong competitive advantage. You express these attributes in a way that elevates your brand while boxing in your competitors.
With clear segmentation, strong value proposition, and compelling competitive positioning, you are ready to express your brand identity in four dimensions:
- Brand as company
- Brand as product
- Brand as person (the human-like traits of your brand)
- Brand as symbol (logo, other iconography, typography, etc.)
Your product road map is strategy in motion. The mission of product development is to drive revenue growth. So it’s important to first understand the “true problem” you must solve in development. True problems include value problems, velocity problems, retention problems, chasm crossing problems, segment expansion problems, or customer expansion problems.
An outward-in approach works best, leading you to the new features that will successfully address your true problem and meet the needs of your top priority segments.
Pricing and Packaging:
Smart pricing is transformational. It starts with understanding the segment-specific pricing demand curve. Key success factors include de-risking the entry point (initial pricing), pricing to penetrate, building an expansion of customer spend into the price structure, and capturing cash up front where possible.
Prospect and Customer Journey:
It’s critical to map the prospect and customer journey. Each step in that journey is a “moment of truth,” where the presence and quality of your messaging will influence the decision to proceed. As such, this journey map becomes the foundation for smart step-specific messaging and sales workflows.
Channel strategy can transform a business. The first step is to identify all possible paths (partner based or internal) to the customer. Some common paths include ISV, system integrator, reseller, distributor, co-marketer, field sales team, inside sales team, or online channels. Next, you must choose your paths of preference and the specific partners you seek to secure.
After that, you need to engage potential partners effectively, building steadily towards a partnership deal. This requires knowing partner deal best practices and the traps to avoid. Finally, once you have secured the right partnerships and have defined your own direct sales channels, you must manage these pathways to the customer with high fidelity.
Unit Economics / Financial Plan Layer
Unit economics establish the boundaries of your business. To chase revenue without regard to the LTV / CAC viability parameters is both irrational and reckless. On the contrary, you must instrument your business end to end so that you have constant visibility into the LTV / CAC impacts of all activities and workflows.
Pricing, variable costs, channel choices, customer acquisition practices, retention and expansion practices, and retention performance all impact unit economics. Metrics dashboards from all workflows should be structured to roll up to summary LTV / CAC calculations.
Metrics dashboards should start at the lowest level workflows and build up, like a pyramid, to overview metrics for the business. At the top of the pyramid is the financial plan. Here, one should find GAAP financials, headcount schedules, and all key strategic and operational metrics, with trending. All should show both Plan and Actual.
In a perfect world, “actuals” are populated via automatic links to source repositories of data (accounting, contracting, billing, the CRM, and product systems).
Tools / Information Architecture Layer
To optimize revenue engine performance, you have assembled vendor tools. This marketing and sales tools stack must be set up such that data flows seamlessly across the system in support of your end-to-end workflows, always yielding one source of truth. The architecture of your data should:
- Define your customer hierarchy (parent/child/grandchild relationships)
- Define stages of the prospect and customer lifecycle
- Define other key factors (billing arrangements, sales territory rules, etc.)
Messaging Schema Layer
Your messaging schema is your detailed blueprint (and the corresponding messaging assets) to guide day-to-day messaging execution at every stage of the prospect and customer journey.
Inside your messaging schema are the statements that achieve:
- Vision lock (“I understand what you refer to and why it’s relevant to me”)
- Conviction lock (“I’m convinced”)
- Advocacy lock (“I’m a raving fan”)
If your business model includes sales development reps, account executives, and customer success managers, then the messaging schema includes six playbooks (otherwise, just the first the first three):
- Brand playbook (the style guide)
- Product marketing playbook (the key focus areas, themes, and positioning objectives; the collateral assets and publishing calendar)
- Growth marketing playbook (the campaign objectives, campaign plan and testing plan)
- Sales development playbook (personas, programs, use cases and plays)
- Account executives playbook (from “opportunity” to “closed won” plan, pitch deck, plays)
- Customer success playbook (programs and plays).
The Bow Tie
With these foundational layers in place, you can now execute workflows more effectively along the Bow Tie.
The Bow Tie tracks the prospect and customer journey, which is defined by the prospect’s and customer’s steps all the way from “disengaged” to “raving fan.” Each step is a moment of truth in which you seek maximum positive influence.
The following functional requirements are typical at different stages of the Bow Tie:
The Bow Tie is where the “rubber hits the road.” As you execute influence at every step along the prospect and customer journey in a highly disciplined way — time after time across all prospects and customers — small positive increments build up until they accumulate into a mountain of momentum.
Like the design, development, and production of a Porsche engine, it’s not easy. It takes a blueprint, and lots of hard, iterative work. But it’s worth it.
Grab the tools, and get going.
Why Listen to Me?
In 2007 I founded and built a tech company, which became, after a couple of name changes, Digital Air Strike. Over six hard-fought years, we took it from zero to $20M revenue and cash flow positive. It was way harder than anything I’d previously done. It was certainly harder than my previous job as president of Knight Ridder Digital, where we took revenue from $100M to $200M.
My experience taught me great respect for tech startup CEOs. Moreover, it was the impetus to start the company I now run: CEO Quest. At CEO Quest, we deliver tech CEOs the thing that I lacked — a roadmap for scaling. Today I’m privileged to work with a diverse group of CEOs, all outstanding individuals running rapidly scaling companies.
We obsessively seek to help our members make a steady drumbeat of sharper decisions, resulting in company acceleration. I’ve been able to bring my experiences to bear in a way that helps these great CEOs, which is a privilege. But, the learning path has been a two-way street. In the midst of my advice to them, I constantly find I learn much in return.
My desire to provide CEOs with the very best answers and ideas for company building at every stage of the journey led me to become a keen student of revenue engine best practices. Which, in turn, galvanized this research project, begun over 3 years ago.
I conducted deep research into the revenue generation practices of high-performing CEO Quest member companies — FiveStars, ClearCare, Healthline, Qubole, Lightbend, DispatchTrack, AcademixDirect and more.
Additionally, I completed in-depth research with non-members such as EventBrite (whose revenue engine is finely tuned and highly impressive). My thanks go out to these companies for giving me the access and visibility I needed into their structures, tools, workflows and daily practices.
Practitioners such as Matt Curl, VP Sales and Chris Luo, VP Marketing at FiveStars; Chris Aker, VP Sales at EventBrite; Bruce Cleveland, founding partner at Wildcat Ventures and executive director of the Traction Gap Institute; Tom Grubb, Chief Strategy Officer at Digital Pi; Scott Albro, CEO of the sales and marketing consultancy Topo; Andrea Tucker, a leading messaging expert and CEO of StrategyApplied; David Puglia, CMO of Jive Software; Jon Miller, CEO of Engagio; Evan Liang, CEO of LeanData; Paul Albright, CEO of Captora; Mark Brewer, CEO of Lightbend; and many others critically evaluated the framework and provided further insights. Bill Portelli, my partner at CEO Quest and the former founding CEO of CollabNet, has read every word and has made major contributions. Finally, I extend thanks to my trusted editor, Trish Heald — a ceaseless advocate for fit and trim writing.
These are just a few of the folks who’ve significantly contributed to this book. I am deeply indebted to them.
- Aileen Lee.“Welcome to the Unicorn Club, 2015: Learning from Billion Dollar Companies.” TechCrunch Web. 18 July 2015.
- Carmen Nobel. “Why Companies Fail — and How Their Founders Bounce Back.” Working Knowledge Web. Harvard Business School, 7 March 2011.
- Diane Mulcahy. “Six Myths about Venture Capitalists.” Harvard Business Review. May 2013.
If you would like more CEO insights into scaling your revenue engine and building a high-growth tech company, please visit us at CEOQuest.com, and follow us on LinkedIn, Twitter, Facebook, and YouTube.