Quality Revenue: Profitability
Gross Margin indicates how efficiently your company produces its services and your financial health. Despite being a key driver of your company’s profitability, it often doesn’t get much attention. We think that is a mistake.
As mentioned, Gross Margin (GM) is a key indicator of the strength of your company. It indicates the efficacy of your sales team and go-to-market strategy and your potential for real growth. In other words, this measure of how much revenue you are able to command above the costs to produce it point to whether you have a product worth selling and company worth expanding. Moreover, your GM funds all the activities needed to continue expanding your company; these dollars fund your expansion strategy, R&D, key hires, etc. There is an opportunity cost for ignoring your GM - your company will be less agile and able to execute on business plans in the future.
GST recommends two approaches to improve your GM. First, focus on setting your product apart from competition to defend its differentiation and uniqueness. Only in the absence of competition do you experience the freedom to set your price and prevent your gross margin from being chipped away at over time. Helpful tactics to improve the defensibility of your product include hyperspecialization, stellar product development, and rigorous sales and marketing approaches.
Additionally, we recommend creating a waterfall graph. On the horizontal axis, graph cohorts of customers differentiated by a single variable (vertical, segment, persona, product, geographic location, sales rep, etc). The vertical axis then will indicate the average GM of each cohort. From this graph, you will easily see which cohort leads to the highest gross margin. Over time, you can decide whether a particular cohort regularly returns the best margin and then pivot towards those. Alternatively, you can track whether another cohort regularly returns unimpressive gross margin numbers and so needs to be cut or revamped.
Over the next few weeks, we will be discussing factors to consider in your pursuit of high-quality revenue.
As always, we love hearing from you as to what you're experiencing as you drive growth for your company; please reach out below.
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