Business owners consider turnover to be a key measure of their company's growth. However, behind this superficial number lies a deeper narrative that sets one company apart from another.
While two companies in the same industry may exhibit similar sales numbers, the underlying dynamics of their revenue streams can be vastly different. Sales quality is an important factor in differentiating between companies that may appear similar at first glance.
Quality turnover is shaped by many different factors that go beyond just numerical elements, and also embodies elements of sustainable growth, customer loyalty, innovation capabilities and strategic decisions of a company's leadership. Let us list a number of dimensions that have an impact on the quality of a company's overall revenue.
First, the origin of turnover reveals important insights into a company's customer acquisition strategies. The turnover generated by intense marketing campaigns may produce immediate results but may lack the longevity that typically occurs when you have sales through organic customer referrals. When a lot of marketing dollars are spent acquiring new customers, the customer acquisition cost (CAC) is high. Newly acquired customers will boost their sales volume in a given year, but the question remains how long these customers will remain customers. In other words, will marketing dollars increase sales volume in the long run? Much will depend on the repeat purchases of these new customers who rely on the “value for money” one gets from purchasing the product or service.
Second, the composition of sales volume also reflects the innovation capabilities and product diversification strength of the company. Revenues from cutting-edge products indicate market importance and adaptability, while reliance on legacy offerings can leave a company vulnerable to obsolescence. Striking a balance between innovation and legacy products is crucial, ensuring sustainable revenue streams. The simple question to answer is what percentage of sales come from products that the company did not offer five years ago. Roughly 20% shows a healthy balance as the company knows how to balance selling old cash cows with new products with high potential.
Besides, the distribution of turnover across high-margin and low-margin products will affect the profitability of the company. Ideally, a company only sells products with the highest profit margin. But the reality is not that simple. Sometimes, a combination of “razors” and “blades” is needed. Some companies have low-margin products (“blades”) that they need to sell in order to sell complementary, high-margin products (“blades”). Think Pepsico with Sodastream. Selling the Sodastream water maker would be a low margin sale, but they need to do this to get high margins on the flavors and CO2 cylinders.
The number of products that contribute to turnover is also a factor to consider. A high number of products can complicate operations, which can hinder agility and efficiency. However, too low a number of products may lead to concentration risks, exposing the company to vulnerabilities arising from market disruptions or competitor innovations. Finding the right balance between product diversity and simplicity in operations is crucial. The number of products that make up the total turnover depends somewhat on the industry, but it is still a factor to take into account. Reducing products typically increases operational efficiency, resulting in a better gross margin per product.
Furthermore, companies should measure what portion of sales volume comes from “easy-to-serve” and “hard-to-serve” customers because it determines the scalability of sales volume. If sales volume increases by 20 percent, but all of the growth is coming from customers who need a lot of after-sales attention, you might raise the question whether this is a positive because it will require additional resources such as potentially more FTEs on the customer success team.
Finally, there is the predictability of rotation to consider. Are we serving customers who will return next year or are these one-time sales? Ideally, you have a high rate of recurring revenue as the cost of serving these customers will likely decrease in the following year.
High-quality turnover will be the result of the relationship between many different factors such as strategic choices, innovation efforts, quality of company operations, and efforts to be highly customer focused. As companies strive for sustainable growth, they should not only rely on turnover as a KPI, they should also look at the key elements that determine the overall quality of a company's turnover.
