Our prior post described KGA’s Market-Product Prioritization method which was developed because rising interest rates have caused capital markets to contract. All fintech vendors need to conserve cash compared to the last decade. Boards and investors are requiring current business plans that create scale, not just expansion.
Most younger firms – and younger products at larger firms – have made it past infancy by proving that there are buyers. What the vendor ends-up with is having sold a couple (or more) deals in multiple markets with multiple editions of its product. The business is simply doing too many things that are not repeatable, cash is being burned in the name of growth, and profits are elusive. The business is not setup to scale, so it must prioritize its investments
Step one of KGA’s Market-Product Prioritization method resulted in an inventory of the potential sources of scalable revenue. In the final step, below, we evaluate the potential sources, pick the priorities, and develop the execution plan to generate scale.
Evaluate the Combinations
Over the time horizon, the revenue (or margin, or whatever is the firm’s success criterion) should be estimated, including the existing market-product (i.e., organic growth). The growth rate coming from the sum of the opportunities can then be compared to the firm’s target growth rate to judge whether the potential sources of revenue are sufficient.
These estimates should not be laborious as precision is not required. Given the way these estimates are used (described below), even lacking data, an educated guess may be good enough. If the vendor simply has no idea of the potential revenue, then the potential opportunity should be out-of-scope over the time horizon. If there are ties among a couple of potential revenue sources, then a bit more detail can be added.
It must be noted that these estimates are useful for the limited purpose of this exercise. They will not yet result in a formal revenue plan or an investor presentation.
Of course, the payoff must be evaluated in the context of the effort it will take to capture the revenue. For this purpose, it is best to consider the entire effort it takes to launch and serve a revenue opportunity. It is not sufficient to consider only whether the software is complete. Other parts of the business model will likely need an investment to capture a new revenue source.
The “other parts of the business model” should be defined by the Whole Product and include considerations like differences from the existing business model in messaging, partnerships, onboarding, solution packaging, solution architecture, compliance, and much more.
Like the Payoff estimation, the Effort estimation does not need to be laborious. For each potential revenue source, the vendor can simply indicate (Y/N) whether there is effort to be undertaken for each Whole-Product business function to succeed in the new market-product pair.
It is important to indicate the places in the existing business model that need improvement to capture the existing market-product revenue. It will likely be the case that the existing revenue source will be the lion’s share of the revenue over time. If there are considerable holes in the business model that need plugging to capture the revenue, they must be identified.
The estimation of success for each revenue source can also be simple. It can include considerations like vendor skills/bandwidth, similarity to prior successes, risks, competitive strengths/weaknesses, or any other consideration specific to the vendor and/or the revenue source.
Select the Priorities
Each revenue opportunity should be scored across the 3 metrics: Payoff, Effort, and Likelihood-to-Succeed. For clarity, if there are 5 revenue opportunities, then there will be 15 scores. Each opportunity should be given a score of High or Low for each of the metrics. There is no need to be more granular than High/Low.
The H/L scores must be considered relative ratings. So, across 6 revenue opportunities, there should be 3 H and 3 L for each of the Payoff, Effort, and Likelihood scores. This forced-rating will avoid the problem of everything being “High”.
For Payoff, the revenue sources with the highest revenue values over the time horizon will receive a High. For Effort, the sources with the highest number of business functions with a “Y” will get the High. Likelihood should simply be evaluated as High or Low for each revenue source.
There are techniques to deal with two issues in scoring the Effort: (1) not all the “Effort=Y” involve the same amount of effort, and (2) some initiatives, if undertaken, will require efforts that will open up another revenue source with limited effort, so double counting the effort should be avoided.
Each revenue source will emerge with a H/L rating on the Payoff, Effort, and Likelihood metrics. There are 2 patterns to discern right away:
- Payoff=H, Effort=L, Likelihood=H is a winner and will become a priority
- Payoff=L, Effort=H, Likelihood=L will fall out-of-scope until the profile improves, if ever.
The other patterns are less obvious and can be considered as follows.
Priorities can be expressed in terms of simple timing concepts: Now, Next, Later, and Maybe Someday. Again, the intent is to avoid complexity. Of course, the labels can be anything, but it is not recommended to use actual years. Absolute time will be determined by when the required execution efforts are documented.
Those with the H/L/H pattern are Now and those with L/H/L are Maybe. The others must be discussed, and judgement calls made. Sanity checks will be applied like “Are there too many Now?” in which case prioritization has gained nothing. Or, “Do the revenue sources get pursued soon enough to meet the estimated Payoff by the end of the time horizon?”. Or, “Are there too many Later which introduces the hockey-stick risk?”.
This set of discussions will result in further consideration of the metric scores that were given to the revenue sources, and it will bring up whether there is a need for a little more precision in the scores if there are too many ties.
The last step in the process converts the “Now” priority(ies) (only) into the initiatives required to capture the revenue. The initiatives will be generated from the items in the business model marked with “Y” in the Effort scoring. As examples, the new revenue may require a change in marketing, new partners, product development, new regulatory compliance, etc. Initiatives should be defined for each such change.
That list of initiatives should be managed as a formal program, starting with the definition for each initiative of the desired end-state, deliverables, owners, timing, resources, dependencies, risks, and more. The revenue from this Now initiative can only be captured in a pro-active way via the success of the program.
Once the Now initiative(s) is well underway and resources begin to free-up, the same process can be repeated for the Next initiative(s).