Not all revenue is created equal. Revenue from some deals generates strong profits and long-term growth, while others erode margins over time and stress your resources and team. Many commercial teams intuitively know that some deals are mispriced – but it’s not always clear which transactions have opportunities to improve in a sea of transactions.
As you look for opportunities in your pricing, it can be tough to know where to start. This is where a quality of revenue analysis can be useful. Businesses can pinpoint where revenue maximizes profitability (or not), where revenue is associated with exceptionally high costs to serve, and where revenue has long-term growth potential. When done right, this can help the commercial team focus on the customers, and products/services that have the most potential for improvement.
1. What Defines High-Quality Revenue?
The first step of this process is to understand the goals for assessing your revenue. Ask yourself: Is my priority market share, profitability, or long-term growth?
As an example, let’s assume our goal is to maximize profitability and ensure long-term growth, in which case, key measurements for quality should relate to margin and customer relationship.
You might find that you have customers who aren’t profitable to serve. Even if it’s a large account - they may have low-margin deals, require a high cost to serve, or both. Sometimes, we’re okay with losing a little margin if we know they provide other strategic value in the bigger picture. Are they working with your team to develop products? Are they ordering ahead of time to maximize efficiency for both parties? Are they communicating the value of your products to the end customer? These priorities become guideposts for selecting your criteria.
2. Identifying Metrics for High-Quality Revenue: Data Availability vs. Fit
Once you’ve established your strategic goals, the next step is identifying the right metrics to measure high-quality revenue. Key metrics might include basic financials, cost-to-serve burden, relationship maturity, order behavior, or co-development partnerships. It’s important to choose metrics that not only reflect the financial health of your revenue but also provide insight into customer behavior to create a quality of revenue picture. As an example, customers who work with you to co-develop products have a higher quality of revenue when compared to customers who only purchase parts.
The challenge here is ensuring that the metrics you select are both available within your existing data and tailored to the unique demands of your business. In a limited data environment, it is possible to develop calculated metrics to serve as proxies for the intended measures. We often find that clients develop a list of data requirements that can be incorporated into future technology updates but use currently available data to get started.
3. Scoring and Identifying Opportunities
With your metrics in place, the next phase is to apply scoring systems to your data. This quantitative approach helps you rank and categorize transactions based on their quality of revenue. By assigning scores and weights that reflect factors such as purchase frequency, average transaction value, and overall contribution to profitability, you can easily identify which transactions are driving your business forward and which might be dragging it down. The analysis can be rolled up to the customer or product level, depending on the nature of the business.
Interpreting these scores effectively allows you to spot untapped opportunities. We can use peer group outlier analysis to identify poor-performing customers and develop plans that can be put in place for the go-to-market team to execute.
4. Implementing Pricing Actions
The insights from quality of revenue analysis should directly inform your pricing strategy and support your commercial team with creating their plans. You may learn things like:
- You have an opportunity to approach some accounts more strategically and expand their product mix by changing incentives and Give-Gets in your next negotiation
- Some customers are not profitable for your business, and you can have a transparent conversation with them about how to recalibrate on value and fair pricing
- Engagement with your top customers could be improved through new messaging, improved relationships, or training for new users
5. Measuring Outcomes
Maintaining the quality of revenue analysis is essential for accountability and informed decision-making. By comparing quality of revenue results to prior plans, we can evaluate key factors such as price negotiations, incremental purchases, and other customer behaviors. By having appropriate measurements, we can continue to improve our quality of revenue over time.
Quality of revenue analysis is more than just a financial tool—it’s a strategic framework that empowers businesses to make smarter, data-driven decisions. This analysis will help uncover opportunities in your current revenue base and realign your strategic goals with your commercial team. A consistent review of the quality of revenue will help keep your team and customers accountable to the agreed-upon plan.
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Holden Advisors is a team of experts in pricing and sales performance.
We help build and protect our clients’ pricing power by leveraging decades of expertise in negotiation, sales strategy, and value-based pricing.
