The following post was originally published in July 2010.
Question #1: in which aircraft would you feel safer flying – a single engine jet or a twin-engine model? Question #2: as a shareholder, in which investment would you feel more secure with your money – a business with a single, focused product offering, or one with a core product and ancillary revenue lines?
Most of us would agree that diversifying our risk is the better choice. Yet not uncommonly, large and mid-sized businesses alike are engineered as single engine jets – lean, efficient, easy to operate and maintain. The strategic design of these companies is admirable and many fly at high altitudes for extended times. Other single engine companies do not fair as well – their single-minded focus and obsession with efficiency leave them insufficiently buffeted against a fault or failure in their engine. When that engine sputters, there is little opportunity to maintain altitude, and the business enters a glider phase – slowly descending.
The recent economic downturn and slow recovery provide valuable lessons in revenue engineering. The retail sector, and hard goods in particular, has been especially challenged in this environment. Those companies hardest hit by the recession were insufficiently diversified to weather the storm.
A prudent twin-engine strategy for these retailers is to develop ancillary revenue streams, by leveraging their core physical assets. Consider these examples: the cinema that uses its physical locations for business meetings; the general merchandise retailer with a cobranded bankcard offered to its shopper base; and the coffee chain that enrols its walk-in traffic in a fee-based membership club offering. Each business has a strategy to lessen its revenue dependency on a single business driver, by creating an engine for new growth.
Naturally the best time to create ancillary revenue sources is before a dip in the core business – before the single engine fails. Still, while in a negative revenue growth cycle, opportunities abound, including (and notably) fee-based subscriber or member services that are developed and funded by specialty service providers. Leveraging their brand, database, and store traffic, large retailers have the potential to capture new and recurring revenues with little to no investment or effort. The best in class retailers generate more than one-third of their profits from these programs. Unlike ‘stack ’em high, price ’em low’ merchandising, fee-income programs don’t require marketing capital, inventory management, or human resource investments. They are a simple and powerful tool to engineer the business to weather the turbulent times.
The Bottom Line
It is never too late to build new revenue streams without taking on additional risk in the business. Fee-income services offer a capital-light, high-return method of optimizing the value of your customer relationships immediately and in a sustainable manner. For a Revenue Potential Audit of your business, contact Stratum Five today.