The Best Type of Revenue (Fixed vs Variable Revenue)

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• published: 07 May 2017
• views: 77

ZACH DE GREGORIO, CPA www.WolvesAndFinance.com Last week I made a video about Revenue, and this week I wanted to go a little bit deeper. Now if you are involved in building a marketing plan or a sales strategy, you know that it can be a very complicated subject. A lot goes into it. People spend entire careers studying marketing. I don’t claim to be an expert in marketing, but I am an expert in accounting. So I want to talk about revenue from an accountant’s perspective. There is one central concept about Revenue that is very powerful to understand. The concept I want to cover is “Not all revenue is equal.” This is basically saying that there are different types of Revenue. To put this another way, $1 of one type of revenue is not equal to $1 of another type of revenue. Just stop an think about how significant this is. $1 is not equal to $1 when you look at the money coming into your business. So to understand what this means, let’s first look at three different types of revenue: • First time customers • Repeat customers (variable revenue) • Repeat customers (fixed revenue) The different between first time customers and repeat customers is fairly obvious. You are going to have customers who are buying from you for the first time, and then you are going to have customers that keep coming back and making purchases at your business. But then when you look at repeat customers you need to break it down even further. Variable means the revenue goes up and down each quarter and you have no guarantee of what it will be. So you have customers coming back, but you don’t know how much they will spend each time. Fixed revenue typically comes from some agreed upon contract with the same level of revenue each quarter. So those are three different types of revenue. Now if you ask any business owner, they will tell you this list is in order of preference. Repeat customers generating a fixed revenue source is the most attractive. So the order of preference is first time customers, Repeat customers with variable revenue, and Repeat customers with fixed revenue. I discuss three reasons why Fixed Revenue is attractive: Practical, Financial, and Personal. So in reality, every business has all three types of revenue. You have first time customers. Those customers turn into repeat customers. Those customers turn into fixed revenue contracts. We talked about how that plays out from a practical perspective in planning your operations. We talked about the financial perspective in valuing your business. And we talked about the personal perspective in managing the relationships with your customers. I like to talk about this idea, that not all revenues are equal, because it affects all kinds of decisions you make every day in your business. I just want to add one more clarification. I am not suggesting you treat your customers differently. Each customer relationship is equally important to the health of your business. All I am suggesting is to understand the financial perspective, and when you go to a bank, they will put a value on the difference between different types of revenue. Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.

The Best Type of Revenue (Fixed vs Variable Revenue)

• Report rights infringement
• published: 07 May 2017
• views: 77

ZACH DE GREGORIO, CPA www.WolvesAndFinance.com Last week I made a video about Revenue, and this week I wanted to go a little bit deeper. Now if you are involved in building a marketing plan or a sales strategy, you know that it can be a very complicated subject. A lot goes into it. People spend entire careers studying marketing. I don’t claim to be an expert in marketing, but I am an expert in accounting. So I want to talk about revenue from an accountant’s perspective. There is one central concept about Revenue that is very powerful to understand. The concept I want to cover is “Not all revenue is equal.” This is basically saying that there are different types of Revenue. To put this another way, $1 of one type of revenue is not equal to $1 of another type of revenue. Just stop an think about how significant this is. $1 is not equal to $1 when you look at the money coming into your business. So to understand what this means, let’s first look at three different types of revenue: • First time customers • Repeat customers (variable revenue) • Repeat customers (fixed revenue) The different between first time customers and repeat customers is fairly obvious. You are going to have customers who are buying from you for the first time, and then you are going to have customers that keep coming back and making purchases at your business. But then when you look at repeat customers you need to break it down even further. Variable means the revenue goes up and down each quarter and you have no guarantee of what it will be. So you have customers coming back, but you don’t know how much they will spend each time. Fixed revenue typically comes from some agreed upon contract with the same level of revenue each quarter. So those are three different types of revenue. Now if you ask any business owner, they will tell you this list is in order of preference. Repeat customers generating a fixed revenue source is the most attractive. So the order of preference is first time customers, Repeat customers with variable revenue, and Repeat customers with fixed revenue. I discuss three reasons why Fixed Revenue is attractive: Practical, Financial, and Personal. So in reality, every business has all three types of revenue. You have first time customers. Those customers turn into repeat customers. Those customers turn into fixed revenue contracts. We talked about how that plays out from a practical perspective in planning your operations. We talked about the financial perspective in valuing your business. And we talked about the personal perspective in managing the relationships with your customers. I like to talk about this idea, that not all revenues are equal, because it affects all kinds of decisions you make every day in your business. I just want to add one more clarification. I am not suggesting you treat your customers differently. Each customer relationship is equally important to the health of your business. All I am suggesting is to understand the financial perspective, and when you go to a bank, they will put a value on the difference between different types of revenue. Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.