Product Bistro: Good Revenue vs. Bad Revenue

It's been one of those situations the last couple of weeks where the same topic has come up in several different conversations. Maybe it was just because the topic was still fresh on my mind from the last conversation, I don't know. Anyway, most recently is was over lunch with a colleague where we were talking about the various stages that products go through. Part of is has to do with where the company is in its maturity lifecycle, especially in the context of a start up product business.

One of the challenges every startup faces at one point or another is setting a strategic vision and sticking to it. Sometimes that means very tough decisions have to be made about what capabilities are added to a product, who the product is designed for, decisions around who your customers are and who you sell it to. The hardest decision though is to turn down revenue. You'll see what I mean in a moment. 

Early is a startup's life, you are learning from every customer interaction, every sale, and even every sales call. The ultimate evidence you are onto something interesting (or that begins to validate your idea) is that customers will pay you money for your product. Not one or two customers, but lots of customers, on a repeated basis.

I learned in my first consulting business that having the right product or service is just part of the equation. You've got to have the necessary cash flow to turn into working capital to fund the growth of your company. That focus for cash flow can also be at odds with the goals for bigger revenues down the road for your company. You may take more consulting or services dollars that could later impact your valuation during a sale. Or customers who really aren't your sweet spot may want you to add features useful to them and not your target customers, or that may take you off track from delivering needed capabilities of your target customers.

You are likely to reach a point where not everything someone will pay you to do helps you advance the strategy and goals of your product and/or your company. The hardest thing to do can be turning down revenue, such as when a customer deal is on the table provided you add a feature that isn't core to your market. Or a deal that could distract resources from the efforts that really do serve your target market and customers. If you are strapped for cash, you do what you have to do, but at some point in your product maturity lifecycle you must be clear on which customers' needs are at the center the target and which are at the periphery.

Good Revenue vs. Bad Revenue -- Here's my definition. Good revenue is revenue (customer sales, partnerships, investments, etc.) that advances the product and company's strategy, leverages the investments made in the product, does not distract resources from strategic initiatives, and, in most but not all cases, adds support to the cash flow needs of the company. At certain times building up a customer base is more important than profitability, such as is true with early startups. Bad revenue is the opposite; it may add to the cash flow and revenues of the company but it leads resources, the product and possibly the company away from the target market and customers, and ultimate goal of the company.

Let's take an easy situation as an example. If you are a product company, some services may be required to helps customers implement your product. This could be performed by a partner or may be a service offering of the product company. But professional services can be an infectious thing. While delivering services, many other needs may be identified that while you have the skills to do, aren't really about helping sell, install and support your product for the customer. Do too much professional services and the company valuation could be damaged because not a large enough percentage of the revenues come from product sales. (Consulting / professional services companies are usually valued around 1x annual revenues whereas a product company can be valued at 4x, 6x, 10x or more.)

Another good example are the different needs of large businesses, mid-markets and SMBs (usually under 50 employees.) A large deal could show up worth several hundreds of thousands of dollars (or more), but the gap between your product and what that customer needs can be very great, no matter how desirable the deal may seem. Rather than a one-off deal, it would be better to really think through if that's a market to go after, be brutally open with yourself and amongst the team to examine what it takes to be successful in that market, and if the company has the both the capacity and capability to service diverse markets or verticals. Good revenue deals help and can even propel the product towards meeting your goals, and bad revenue to significantly hinder your progress.

This may mean turning down revenue, i.e. bad revenue, because of the defocus and distraction from your goals and strategy. In the larger sense, you could be missing even bigger opportunities serving those other customers and markets. It's a tough call, but it comes down to whether you are committed, disciplined and believe strongly enough in your chosen direction to remain focused. To counter balance that, you must challenge your assumptions and constantly revalidate them to make sure your decisions are those that will accomplish your goals. This is not an easy thing to do, especially as a startup begins to mature. My experience though is that this is a necessary step you must take to be able to accelerate revenues, and continue to grow and mature the product and business to reach those future goals.