Leveraging Revenue Management capabilities such as price optimization, marketing mix optimization, and sales analytics, should be a critical part of the tactical performance improvement efforts across the enterprise, as part of a holistic approach to optimizing the revenue and cash flow of your business. By implementing price optimization, we’ve seen companies generate 2%+ in organic revenue growth.
However, for some companies and industries, revenue optimization can deliver more than just points of immediate revenue – revenue optimization can be a strategic lever for increasing shareholder/owner value beyond the immediate revenue enhancement opportunity. In this two part blog post, we will focus on two scenarios where implementation of revenue optimization is critical to drive immediate revenue as well as essential to the holistic organizational strategy.
Companies with a High Price to Sales Ratio relative to their peers should strongly consider accelerating development of revenue optimization capabilities.
While Price to Sales Ratio can be an overly simplistic measure for valuation, a company that is comparatively stronger in this measure is demonstrably generating more shareholder value per dollar of sales.
If your company or industry has a comparatively High Price to Sales Ratio, then compared to your competitors, or other investment opportunities, a boost in revenue is likely to benefit your shareholders more than your competitors’, simply because you are literally getting “more bang” of enterprise value for your “buck” of sales.
For example, Real Estate Investment Trust (REITs) and internet software companies typically see price to sales ratios above six, while retail typically sees a price to sales ratio in the range of 1 – 2. Therefore, leveraging price optimization should be foundational for Real Estate Investment Trust (REIT) or internet software firms. All firms in those industries should be developing Revenue Management capabilities faster than other industries, just to keep pace with their peers and capitalize on the share price impact of several percentage points increase in revenue that revenue optimization often brings.
In retail, the Low Price to Sales Ratio does not mean that retail companies should NOT pursue development of Revenue Management capabilities. In fact, in grocery retail, traditional players such as Kroger or SuperValu have very low price to sales ratio – range of 0.1 to 0.3, but Whole Foods typically is close to 1-to-3-to-5 times higher than their peers. In this case, Whole Foods would differentially benefit more than their competitors would from pursuing revenue optimization or broader Revenue Management capabilities.
For companies in this fortunate position, it is essential to employ revenue optimization capabilities, to ensure shareholders/owners get organic revenue growth resulting in the full value from their investment.