We are often asked “what is the impact of improving time-to-market or reducing the sales cycle?”
Customers may see a benefit in a solution which allows them to release products faster or perhaps means they can get their hands on cash sooner, but the question is, how much value is it really going to generate?
The first step is to find out the current rate of revenue generation. Within our software, we usually use the value in a calendar day, so we divide the current annual revenue by 365 to give us the daily rate. And if the customer agrees that a few days may be saved in the process, the total value generated is simply the number of days saved x the daily rate.
Current annual revenue = £12,000,000
Daily revenue = £12,000,000 / 365 days = £32.9k
Number of days removed from the process by the new solution = 5 days
Total saving: 5 days x £32.9k = £164.5k
For year 1 this makes perfect sense. The question is, does this happen in year 2, year 3 etc?
If we take the CxO perspective, the board are looking at annual revenue which recurs on a yearly basis (ignoring the impact of growth) and, if all other things remain the same, removing 5 days out of a continuous cashflow pulls forward revenue from the future. So, the year 1 extra revenue is equivalent to the value of the 5 days calculated above. However, that isn’t extra cash, it is simply pulled from year 2 into year 1 and similarly from Year 3 into Year 2. Hence, this leads to the conclusion that there is only a one-time pull forward that does not recur.
Now let’s take a different view. The pull forward of multiple product releases allows a business to sell more by virtue of being ahead of the competition, creating early brand awareness etc. This means that whatever the forecast revenue for those products is, it is likely to increase because of the pull forward. The pull forward value is still real, but it will probably be overshadowed by a healthy increase in market share. This could be described as an increase in the number of customers, reduced discounting etc. In this case, the ultimate impact of the pull forward can be repeated year-on-year.
In Shark we have different calculations for this which take the one-time approach, or the average increase spread throughout the whole business case analysis. Choose the one-time approach or the average approach, whichever works for you and your customer, but remember to show the impact of additional sales which could be the bigger prize for the customer.
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