Advice to boost revenue streams or find new ones
Rapid changes in customer buying preferences caused by COVID-19 mean that finance leaders must consider new revenue sources. By Tim Cooper
Finance and treasury
Most CFOs are looking to boost their revenue strategies to remain competitive amidst the continuing challenges of the COVID-19 pandemic. Only some will succeed.
A PwC survey released in June showed that 63% of US CFOs were planning changes to products and services, among other income-seeking strategies. Just 32% were very confident that their companies could identify new revenue opportunities.
Finance leaders are exploring new markets and business models in response to rapid changes in the competitive landscape and customers' needs. For example, PwC data shows that between March and June, half of US consumers had tried new brands or products while at home during the pandemic, and 5% used telehealth for the first time. Many more have become used to buying essential items online.
Alongside enhancing products and services, CFOs also planned to boost revenue by changing pricing strategies (41%), distribution channels (36%), and customer segments and talent (both at 34%), according to PwC.
Leading strategies
Mike Kuehnel, a partner at Bain & Company in Frankfurt, said CFOs are leading the effort to develop new revenue strategies because they understand how to prepare for them and where to invest the company's time. Often, they are best placed to lead the analysis of the huge amounts of data companies have accumulated and optimise that to build new client, as well as products and services, propositions.
"If your existing business becomes stressed or limited in terms of its profitable growth, you may have to consider activities outside your core business but where your existing capabilities and talent are still relevant and can be further leveraged," Kuehnel said. "For example, a bank that focuses on institutional clients might find that segment [becomes less profitable], so look to systematically expand its franchise into other segments such as retail banking using some existing data and systems."
London-based Mike Rocha, global director of brand economics at Interbrand, said many companies are now distributing directly to consumers, for example, by launching subscription services. It is one way to use existing brand assets to improve resilience and generate new revenue streams — a strategy that companies often overlook, Rocha said.
Three more brand-related strategies for driving new revenue are brand extension, transformation, and licensing. An example of brand extension is a moisturising soap provider that expands across many new skin and hair care products. A brand transformation can also open new possibilities for growth, especially if your brand is defined too narrowly, limiting potential new revenues, Rocha said.
Another way to accelerate a revenue change strategy is to acquire another company. Kuehnel said Bain anticipates a pick-up in both scale- and scope-driven mergers and acquisitions as some firms see an opportunity to break into new markets by buying others at lower valuations. Finally, the existing trend from fixed towards variable costs will accelerate because fixed-cost structures are less flexible, making it harder to systematically tap into new revenue streams, Kuehnel said.
However, companies must choose their strategies carefully in this fevered market.
Data creates revenue
Companies should take care not to cut costs overzealously at the expense of growth strategies. Some large companies have focused so much on cost reduction that they have become out of touch with changing customer needs, instead relying on tired brands and neglecting new revenue streams — with dire consequences for their share price.
"One sign that it is time to seek new revenue streams is a sense that you are relying more heavily on cost-cutting to meet targets than previously," Rocha said. "Your brand is getting tired, your customers don't know what you stand for, or you are defined too narrowly by your product set. Market research and data modelling can help identify these problems and identify more attractive ways forward."
Novozymes, a biotech company based in Denmark, is constantly using data to look for new markets. For example, it has recently explored enzymes and microbes that provide alternative sources of protein, remove allergic components in foods, break down odour in clothing, and increase yield from biofuels and palm oil production.
Novozymes CFO Lars Green said new revenue strategies are about understanding customers' needs and reflecting their voice in the innovation cycle, but this has sometimes been a challenge during the pandemic.
"It has been difficult to engage with our customers because we have not been able to visit them physically," he said. "In response, we have introduced and accelerated our digital engagement tools. For example, we have built an online 'inspiration' experience showing what our products can do. This also allows us to reach more new customers.
"We've also learned that data can have a larger role in value creation and generate revenue in its own right. For example, we can supplement our core enzyme and microbe technology by using data generated at customers' plants to improve their yield."
Revenue diversification
The pandemic has increased uncertainty in global markets, making many companies diversify their revenue strategies further.
Frankfurt-based Dirk Arhelger, head of group treasury and investor relations at chemicals producer INEOS Styrolution, said a strategy of diversifying revenue streams by product, sector, and geography is essential.
"We have deliberately diversified customers across industries including packaging, medical, household, construction, and toys and have expanded globally," he said. "It means that, even when developing new revenue streams is not possible, you can shuffle streams in your existing portfolio to mitigate the downsides of one sector or region versus another as they rise and fall."
However, reacting to such demand variation requires flexibility in a company's supply chain, production facilities, planning, forecasting, and processes, Arhelger said.
Supporting office returns
The pandemic is so fast-moving that strategies are likely to keep changing in response. Kathy Wagner, CPA, vice-president of finance at US software company Citrix, said her initial revenue strategy this year was based on pricing. That revenue strategy has since expanded to meet changing customer needs.
"In January, we identified COVID would have a significant impact, so we introduced lots of offers and low-cost licensing to help new and existing customers build business continuity," she said. "Many are now building infrastructure to support a hybrid [home-office] work model, and we are supporting them with solutions for employees working from both. We've also launched solutions that support office reopening tasks such as employee readiness surveys, health and safety protocols, and contact tracing."
To identify new revenue streams, Citrix combines a top-down approach, looking at market opportunities, with a bottom-up approach that anticipates customer needs. Once it has built a business case, it then decides whether to build it in-house or buy or partner with another company.
More broadly, Kuehnel suggests that one way to test revenue-generating ideas is to build a venture capital portfolio within the organisation. "When investing, this group evaluates plans and offers a dialogue that gives you insight into the relevance and economic attractiveness of each idea," he said.
Wagner added that the biggest lesson Citrix has learned around venturing into new markets is that tight alignment is needed between the sales and product teams. "The product team has the vision and understands markets and trends, and sales is closest to the customer," she said. "Typically, if both agree to pursue a venture, it is successful."
One thing the pandemic has shown is how fast companies can change revenue strategies when they need to. Developing the ability to respond rapidly can help a company survive the crisis and capture revenues that support future growth.
— Tim Cooper is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Neil Amato, an FM magazine senior editor, at Neil.Amato@aicpa-cima.com.