Establishing objectives is an integral part of any business planning process, and some of those goals inevitably relate to revenue growth. Revenue growth objectives must be realistic for company leaders to formulate sound business and marketing strategies. The first step in setting realistic revenue growth goals is to identify where your current revenue is coming from.
As the fourth quarter of 2023 draws to a close, many business and marketing leaders will be finalizing their revenue growth objectives for 2024. Growth is the prime directive for many companies, and revenue growth is often the primary measure of business success. Therefore, business and marketing leaders need to set realistic revenue growth goals as part of their strategic planning process.
Having realistic revenue growth objectives is particularly important for marketing leaders since they are usually tasked to develop and implement the programs that will enable their company to achieve those objectives.
To set realistic revenue growth objectives for 2024, business and marketing leaders must have a clearly articulated, evidenced-based revenue growth strategy. One important – but often overlooked – step in developing a sound revenue growth strategy is identifying where growth will come from.
Specifically, business leaders need to answer three basic questions during their planning process.
What are the structural sources of revenue growth in our business?How much revenue growth is each of these sources currently producing?How much revenue growth can we realistically expect to generate from each of these sources in 2024?
How Much Growth Is Each Source Currently Producing?
Suppose your company had total sales of $110 million for the 12 months ending November 30, 2023. I’ll call these 12 months “2023.” You had total sales of $100 million for the 12 months ending November 30, 2022. I’ll refer to this period as “2022.” So, your company grew sales by $10 million during 2023.
For this example, let’s suppose your company did not acquire another business or introduce any new types of products in 2023, but you did begin selling in a new geographic market during the year. Under these circumstances, your primary potential sources of revenue growth in 2023 were base retention, sales to existing customers, sales to new customers in existing markets, and sales to new customers in new markets.
To quantify how much revenue growth each of these sources produced in 2023, you would use sales by customer data from your ERP/accounting system.
Base retention (revenue churn) – To measure the impact of base retention (a/k/a revenue churn), identify the customers who bought from you in 2022. but did not buy from you in 2023. The total sales made to those customers in 2022 is the amount of revenue that was “lost” in 2023 due to revenue churn. For this example, let’s say the amount of lost revenue was $1 million.
Sales to existing customers – Identify the customers who bought from you in both 2022 and 2023, and compare the 2023 total to the 2022 total. For this example, let’s say that sales to existing customers increased $3 million in 2023.
Sales to new customers in existing markets – Identify the customers who bought from you in 2023, but did not buy from you in 2022. Then, eliminate those customers located in the geographic market you first entered in 2023. The sales made to the remaining customers are sales to new customers in existing markets. Let’s say this source accounted for $5 million of the 2023 revenue growth.
Sales to new customers in new markets – This is the total sales made to customers in the geographic market that you first entered in 2023. Let’s say this amount was $3 million.
The table below summarizes the results of this analysis and shows where your 2023 revenue growth came from.
How Much Growth Can We Generate from Each Source in 2024?
Once you know where your current growth came from, you can use these insights to set more realistic and achievable growth objectives for the coming year. The critical step is to analyze why the current growth happened.
In our example, sales to new customers in existing markets produced $5 million, or 50% of the total growth in 2023. One possible explanation for this growth is simply that demand for the types of products or services offered by your company expanded in 2023. In other words, the growth may have resulted from “being in the right market at the right time.” It’s also possible that this growth occurred because your company took customers away from competitors and increased its market share.
Whatever the specific reason, the important question is: How much future growth can the existing markets provide? If they still have substantial growth potential, you may want to focus a substantial portion of your marketing efforts on acquiring more new customers in these existing markets.
On the other hand, if your existing markets do not have significant future growth potential, you’ll need a different strategy to drive growth. You may, for example, want to focus more of your marketing efforts on acquiring new customers in the geographic market you first entered in 2023, or you may need to consider expanding into additional new market areas.
This type of analysis should be done for each structural source of revenue that contributed to your current growth and for any new sources that are expected to contribute to growth next year. Once this analysis is completed, you should set 2024 revenue targets for each source of revenue that is relevant to your company. And, once these revenue targets have been established, you can design marketing programs to achieve those objectives.