The Revenue Equation

Revenue can be expressed as a deceptively simple equation:

Pipeline x Conversion Rate x Average Contract Value = Revenue

This equation is important because as a revenue leader, these are the three – and the only three – levers that you can invest in to change your business.

In this article, we’re going to look at each lever and discuss what can and can’t be changed in a tough macroeconomic environment. We’ll show how our favorite revenue leaders use this equation to tune their revenue cadence to deliver the biggest business impact. And finally, we’ll look at how better internal and external collaboration can improve conversion rate and ACV.

Let’s do some revenue math

Pipeline

Last year, 72% of Chief Sales Officers [Gartner] declared that their strategy to meet revenue targets in the face of tougher macro was to just get more pipeline. Seems right at first glance. But pipeline is an expensive game. While you can optimize at the edge, pipeline is linear at best: you put more dollars into SDRs and marketing, and more leads come out the other end. More likely, there’s a steep curve of diminishing marginal return where every incremental lead is more expensive than the last. That’s because there’s a finite set of prospects, and you’ve probably already spoken to the early adopters.

The second consideration is that in tough macro, your org may not have additional budget to throw at demand generation to grow over last year… especially when a certain percentage of prospects who may have taken a call last year, have been told loud and clear to not even think about new spend.

Smart revenue leaders recognize this. They set the goalposts at “don’t lose ground” and they use technology to make sure their demand generation is as efficient as possible.

Specifically, that means taking three actions:

1. Measure pipeline source separately (marketing, outbound / SDR, rep-sourced) and holding each group accountable to their own goals.
2. Automate as much of outbound as possible without falling into a trap of spray and pray noise.
3. Attribute carefully  to see if different campaigns or strategies yield better or worse leads in terms of final Closed/Won and ACV outcomes.

And maybe a fourth one – expand your addressable market with new use cases or new capabilities. That’s outside the scope of just the revenue org, though…. 

Conversion Rate

If it’s true that pipeline’s best case is “hold the line”, then we have to look extra hard at conversion rate.

Revenue leaders have a lot more control over conversion rate. Messaging, discovery, qualification framework, pricing, inspection, buyer collaboration, and executive engagement are all available to experiment, measure, and iterate on, and they don’t necessarily have hard costs associated with them. 

And yes, conversion is harder in tough macro, too. Easy money is gone, approvals are more stringent and take longer, orgs have change fatigue, and everyone is hunkered down. But budget is still out there. There’s just more competition and more eyes on every decision. 

Revenue teams have to get back to basics and commit to rigorous measurement so they can adjust fast if they want to improve conversion rate. 

The most basic of basics is to show value, and the best only way to accomplish that is through better collaboration with your customers. Collaboration – understanding your customers’ needs and then demonstrating that you can provide a solution – is the only way your reps can get to yes.

Specifically, there are three actions we see the most successful revenue orgs take around conversion rate:

1. Invest in your revenue cadence. This means rigorous inspection to give first line managers as much advance notice as possible for deals that need help; structured 1:1s that create time for reps and managers to really strategize instead of reporting the news for 60 minutes a week; and real-time forecast roll-ups so senior leadership can reallocate resources or change tactics while there’s still time to turn the quarter around. 
2. Train your reps to consistently deliver the one-two punch of showing value with a CFO-ready business case accompanied by a clear, mutually agreed upon path to success, laying out any change management as a set of milestones that promises low disruption and low risk.
3. Keep close tabs on cycle length. Slipped deal win rate is 65% of normal win rate. Make sure everyone is clear what needs to be done, and that sellers are multithreaded and talking to power early, early, early.

ACV 

There’s a continuing trend of smaller average contract values. Call it the logical conclusion of relentless SaaS. Buyers want less and less risk and they want to see value faster and faster. This isn’t catastrophic. It just means that timing is a little different. You’ll close a first smaller, lower risk deal faster, but then once they’re your customer and you’ve proven first value, you have to be relentless yourself on expanding within your base.

This trend was already happening. Macro just exacerbates the situation with even less risk tolerance. On the other hand, if you’re prepared, you can get into accounts that were out of reach when you had a larger upfront cost.

Do this:

1. Invest in account plans with both internal and external perspectives. These don’t need to be complex. For the internal view, you need to have a POV on how you can help this customer, and what an expansion strategy might look like (be that product whitespace or expanding horizontally). For the external view, you just need to show your customer that you have a plan for them to achieve success. Use the QBR or EBR to show you delivered that success.  
2. Don’t wait for the renewal before thinking about expansion. Bake expansion into plans even before you sign the first deal. Create the expectation in both sellers and buyers. This means you might have to tweak account hold policy so you don’t inadvertently disincentivize your hunters. 
3. Sell value. Discounting is primarily driven by perceived value, so if your sellers follow the steps above on providing high value/low risk deals, you won’t have to discount as much.

What About Strategy

We said the Revenue Equation is deceptively simple. As presented above, it’s actually too simple. A single conversion rate for your entire team hides too many sins and ACV varies too much across different segments. 

Just saying “deal slip” or “not enough pipe” isn’t good enough. You need a deeper level of detail to be actionable: Which segments are failing? Which stages aren’t converting?  Is it the same stage across each segment? Is performance a sudden onset permanent shift, a long slow shift, or just a blip?  

How can you make good decisions if you don’t know these data points? How can you guide your team and your org through the macro minefield and out the other side 18 months from now?

Without data, you’re going to guess. You’re going to over-invest or under-invest in some or all of the levers you can pull, but you’re not going to know for another six months if you were right. 

With data, you can build a strategy, measure impact, and adjust fast.

So maybe that simple equation should look more like this, because without a strategy, you’re dividing by zero, and that’s a no-no.

[Pipeline ( ) x Conversion Rate ( ) x Average Contract Value ( )]/Strategy = Revenue

Triage and transform your revenue cadence

Your revenue cadence is the engine to accomplish your strategy, making sure reps, front line managers, senior managers, and executive leadership are all collaborating and working toward the same goals.

That’s why we recently published Clari’s Revenue Cadence Playbook, and now you can take our Revenue Cadence Self-Assessment so you can start to triage which revenue moments you should invest in for the biggest impact. You can also benchmark yourself against other respondents.  

Read the Revenue Cadence Playbook here.

Try Clari Align Free Tier

Clari Align is our collaboration workspace solution. In the spirit of encouraging more collaboration, the Align Free Tier gives revenue teams five free Align licenses. 

You’ll see fast improvement to your conversation rate with Align. Reps will follow your process more closely, selling on value is more natural, and inspection becomes 10x more productive. Plus, you’ll find yourself making 10x less effort on Sunday nights. 

Get your five seat org here or read more here.

Note: Clari customers will see Align fully integrated into their Inspection Dashboard, but non-Clari customers are also welcome to use Align for as long as they wish, with an option to connect their Salesforce instance or just run Align completely standalone.

Conclusion

By breaking down revenue into pipeline, conversion rate, and ACV, you can be mindful of where you’re placing your bets: if an activity isn’t impacting one of those levers, or if the lever it’s impacting is not a priority, then it’s a lot easier to say no. If an action is carefully constructed to impact a lever, then it’s much easier to measure any impact since you know where to look.

Use your Revenue Cadence to make sure everyone is focused on the same priorities, consider better collaboration as a baseline tactic for improving conversion, and address account planning and faster expansion when thinking about average contract value.

-Tom