While reviewing revenue plans with two different companies I advise, I had some flashbacks to a bad experience years ago where our team learned something important: never put pixie dust in your board plan.
"Pixie dust" is forecast revenue growth from something that is unfunded, has no track record, or has no owner. This magical revenue is expected to materialize from new markets, new business models, or increased efficiency in your existing business model - but without the investment of time, people, or money that is required to make it happen. I know, I know... you are telling yourself right now that "we don't have any pixie dust in our board plan." But from my experience, even really smart management teams let pixie dust sneak into their board revenue plan, especially after 2-3 years of exceeding their goals or if they have a particularly strong or forceful board. The worst part is you usually don't realize it until it is too late. So humor me for a moment and then you can run a few tests to make sure it is free of pixie dust.
Where does the pixie dust in my board plan come from?
There is a lot of pressure to put up higher numbers in the revenue plan, and little pressure pushing down. Investors and board members want to push the company to set higher goals because faster growth is how they earn more money. There are benchmarks and comparables which put pressure on companies to grow as fast or faster than their peers and stay on then same glide path as companies with successful IPOs. Even management teams can get caught up in the pressure to put together an aggressive revenue plan because they want high growth rates too. And when companies have had a history of exceeding plan, you feel like you cannot lose and you are especially susceptible to this pressure.
However, aggressive growth plans alone are not pixie dust. Pixie dust is forecast revenue growth from something that is unfunded, with no track record, or has no owner. Lots of companies have aggressive growth plans and hit them. The key to avoiding pixie dust is not to have a lower growth rate in your board plan - the key is to break down the new revenue you expect and make sure each source of revenue has the funding required, a track record, and an owner who believes the numbers can be hit.
How do I avoid pixie dust in my board plan?
There are two major sources of pixie dust in board revenue plans: (a) revenue growth from something new (new product, new market, new geography) and (2) revenue growth from more efficiency in your existing business.
Pixie Dust Revenue from a New Initiative
Startups can't avoid new initiatives. New products, new markets, new geographies are all the bricks by which growth companies are built. However, unless you want to make a habit of totally missing your board plan (bad idea!) you need to be careful about how you incorporate new initiatives into your goals. The tests to find pixie dust in new initiatives are a relatively straightforward set of questions to ask yourself:
- Funding - Is this new initiative properly funded? For new products this means having all the required product development resources, as well as sales, marketing and other go to market support. For new markets or new geographies, it means all of the necessary go to market investment - which might be quite different than your core business. Thinking that "the existing functions can take this on" might not be the right answer. They have their own growth goals to hit for existing business growth.
- Owner - Is there an owner responsible for the new initiative who bought into the revenue goal? Before something goes into the board plan it should have an owner identified who has responsibility and power to drive the new initiative and they need to believe the goal is achievable. Driving new revenue is a very difficult job and requires dedication and focus.
- History - Is there a history of results that gives us some idea of what to expect? If there is no history for a new initiative, it should not be in the board plan - at least not the numbers. New initiatives take longer and be much harder to get off the ground than expected. Once you have a couple months or a couple quarters of history of revenue from the new initiative, you have a much better sense of how to incorporate it into your revenue plan.
Pixie Dust Revenue from the Existing Business Model
The basic theme here is be very careful about expecting more efficiency from your business, especially while growing fast by increasing scale. You can grow by scale (e.g. hire more sales reps) and you can grow by efficiency (e.g. increase revenue per sales rep), but usually it is hard to do both. During fast growth your product, market, customer base, and team are changing so fast that often keeping up with the growth in scale is so demanding that you can't expect a lot of efficiency gains at the same time - unless you have a big effort devoted to it with proper funding and people behind it. To get a sense of the possible pixie dust revenue from your existing business model, mostly you need to look at a few of the key ratios in your model and see if they change drastically.
- Sales and Marketing Efficiency - Compute these ratios, and then think hard about any of them that change more than 5% in your model: revenue / sales rep, marketing cost / lead, marketing cost / opportunity, marketing spend / sales rep, and CAC (customer acquisition cost). In general, those ratios tend to stay flat over time - unless you have a very specific program to improve them which is well funded and has specific owners at the senior management level. But too often I have seen a CFO or CEO model in a 10% bump in sales productivity or 20% decrease in CAC just because they think the company can do it, when at the same time the sales and marketing leaders are flat out on keeping up with the growth in scale and have no cycles for working on efficiency.
- Retention Efficiency - From my experience customer retention (or the opposite of customer churn) does not change quickly. You can improve customer retention, and doing so will improve growth, but the gains come slowly. I would not model a decrease in customer churn from 3% per month to 1% per month in a year, for instance. Your installed base of customers rarely embraces new features as fast as you expect, nor frankly even thinks about your product nearly as much as you do. Customers generally pay the most attention when they are buying and implementing your products and it is hard to get their attention to re-engage them in a detailed way after that. Be cautious if you expect some magical change in the behavior of your installed base of customers.
- Upgrade Efficiency - Compute the % of customer buying an upgrade each month and the new revenue from upgrades as a % of the revenue installed base, and be cautious if you expect those numbers to change. In general, once you are selling to your customer base via upgrades or cross sales, the rate at which they buy those upgrades does not change a lot. Now, if you have no upselling program in place and are launching one, that can be a great way to reduce revenue churn in a big way - it just might take longer than you expect for this new initiative to get off the ground (see Pixie Dust Revenue from a New Initiative above).
Note: In this article when I talk about revenue plans, I am talking about board plans - the revenue numbers you set as your goals with the board of directors. Your management team should also have a management revenue plan, which should have more aggressive goals (e.g. "stretch goals") than the board plan by 5-25%. For instance, you should strive to have 10% lower churn, 10% better upgrades, 10% more sales productivity, 10% better marketing productivity, etc. That is how you push yourself and your teams to achieve something great, and some of that stuff can come from a little pixie dust. But missing those stretch goals should not create any ugliness in board meetings because managemen plans should not be shared with the board. :)