Revenue Expansion and Contraction Models

Expansion Models

Increment over last year’s revenue

The premise behind this model is that the revenue is expected to be increased by a certain amount for the next year. This could be a multiplier over last years’ number. For example, 30% growth over last year’s revenue.

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Implementation Details

Goal: Last year’s MRR growth (metric) * growth percentage (model input)
Schedule: Seasonality based on last year’s revenue metric

Productivity based models

The basic premise behind this model is that if each individual in a role will product an expected level of output – whether that be in terms of deals or revenue or activity. The number of individuals can then be adjusted based on the expected productivity of individuals in the role based on their ramp. This adjustment reveals the net ramped resource.

  • For this model you need to be able to have a good idea on what the activity levels, conversion rates and productivity is like.
  • Productivity profiles can be created per role or can be provided as an input.
  • Headcount input should already be understood to use this model to arrive at the revenue.

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Implementation Details

Goal: Timeseries projection applied on [Effective Number of Salesperson (Line Item) * Expected productivity per rep (productivity profile by role or model input)].
Schedule: Timeseries projection as above based on net ramped resources

Funnel Conversion rate-based models

The funnel conversion-based model relies on a good understanding of how the top of the funnel converts to revenue. The variable therefore becomes the top of the funnel and how much lead activity can be generated through either marketing spend or inbound/outbound lead generation activity.

  • If the conversion from marketing spend to top of the funnel conversion is understood – then based on the marketing spend the revenue can be arrived at.
  • Typically, there is a lag in marketing spend to revenue conversion and this will need to be considered in the conversion. For example, marketing spend from a quarter before will generate leads this quarter. The marketing spend will therefore need to be either a model input or metrics.
  • Top of the funnel activity can comprise of both marketing spend as well as other lead generation activity. Each of these lead generation activities can be added as a separate line item in the model.

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Implementation Details

Goal: Marketing generated leads (Model input or line item) conversion rate into revenue (metrics or model input)
Goal: Activity generated through lead generation activity (model input or line item)
conversion into revenue (metrics or model input)
Schedule: Seasonality based on expected marketing spend (model input or line item)

OTE Multiplier

This method takes the approach of expecting to produce a multiplier on the amount of “on-target earnings” spent on the headcount used for revenue generation. To calculate the expected revenue – you would multiply the monthly OTE of the resources and then multiply by the conversion rate.

  • The idea here is that the model is based on the number of people and their expected return historically.
  • The OTE multiplier simply multiplies the number of people by the multiplier that has been achieved and adjusted for productivity.

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Implementation Details

Goal: Timeseries projection applied on [Effective Number of Salesperson (Line Item) * Expected productivity per rep (productivity profile by role or model input)].
Schedule: Timeseries projection as above based on net ramped resources

Production constrained

Sometimes the amount of sales that can be done is based on how much product can be produced. Therefore, the ability to deliver a product or service can therefore be constrained by the production capacity.

  • Where the sales are constrained by the ability to produce or service the product.
  • Manufacturing limitations or distribution limitations.

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Implementation Details

Goal: Expected Production capacity * Sales price per unit
Schedule: based on expected production capacity with perhaps a delay for distribution

Custom provided

The amount of revenue expected can also be provided as a model input. For example, when the number is not really based on any historic model or any other models.

  • This could be set by the board and is statically provided.
  • Schedule and seasonality could also be provided as a model input.

Churn or Attrition

  • Loss of customers – who cancel their contracts
  • Loss of customers due to suspension or non-payment – i.e., cancelled by the company
  • Reduction in service – customer reduces the usage
  • Reduction in price – the price is reduced for customers