Building the Operating Model for Accelerating Revenue

by Vikrant Duggal November 2nd, 2021

Introduction

A key pillar of any revenue acceleration engine is the operating model.

The operating model is the underlying system that enables the rhythm of your business. It holds the assumptions that will drive initial and recurring revenue, in addition to upsells and churn. It is a wonderful tool for creating alignment across the team and building trust with investors.  When founders ask me or Shreesh “What’s next?”, we know there’s an underlying hesitation or anxiety around the best way to deploy capital. The money raised and being generated has to be spent somehow, but there are smart ways to spend it and most founders don’t know how to best determine the optimal method for this.

Most founders are trying to answer a few questions:

  • How do I grow my business?
  • How do I laser in on my target customer who really needs what I have to offer?
  • How much top line revenue will my cash generate?
  • How do I know how much it will cost to get a return on my spend?

The financial model’s first input is top line revenue and then you work backwards from that to determine budgets/expenses for a given year. The operating model will determine the guiding cadence for day to day revenue operations. There is nothing worse for revenue acceleration than either cash sitting on the balance sheet with no plans for a large portion of it, or spending ahead of plans because there’s no plan to determine what revenue-related outcomes you are focused on.

Anatomy of the model

Establishing the operating model for how your company will achieve milestones is critical. For any business that generates recurring revenue, especially in B2B startups, this is about starting to understand what lies beneath top-line revenue growth. In practice, the operating model looks like the illustration below. I’ve provided a simplified version for the sake of the visual.

Let’s dig into the model.

We want to examine what top line growth is going to look like from the Sales Lens and the Marketing Lens. This is important because these are our Annual Recurring Revenue (ARR) numbers and this is the number we desire to accelerate.


In the visual above, the operating model breaks down revenue coming from sales and revenue coming from marketing. It allows you to set assumptions (in blue) and provide the output values (in black). This is not a set it and forget it document. It's a living, breathing asset, like your startup. It allows key leaders, investors, even customers to come to the table to better understand how the business plans on growing. Assumptions are challenged weekly, monthly, or quarterly depending on the stage of your startup.

From the sales lens

If you’re planning a top-down then you’ll want to build out a revenue model from this perspective. Let’s work our way down from the revenue line (top line).

Calculations

  • The Annualized Recurring Revenue (ARR) will be 12 times the End of Month (EOM) Monthly Recurring Revenue (MRR) Install Base. This will most often be the top line of the operating model.
  • The End of Month (EOM) Monthly Recurring Revenue (MRR) will take the Beginning of Month (BOM) Install Base and add the Net MRR from the month.
  • Net MRR is a calculation of Churn MRR subtracted from the New MRR.
  • New MRR is a calculation of sales rep quotas based on ramp (new vs. full quota account executives).
  • Churn MRR is a percentage of the BOM Install Base. Basically, you’re holding an assumption of churn each month. If you have quarterly, or annual contracts you will adjust.

Assumptions

As you can see most of the numbers in the model are calculations. Now we move on to our assumptions. This is where things get really interesting (and fun!).

Again, from the top, we start with a BOM Install Base. Let’s say you ended last month with $350,000 in MRR, this is what you would enter.

Next you will list the number of Full Quota Account Executives and the value for New MRR / Full Quota Account Executives. Multiplying these two values will give you the amount of MRR you expect to generate from fully ramped Account Executives.

If you don’t have any Account Executives and one of the Founders primarily does the selling then you can put 1.0, or 0.5 of an executive. You’ll enter values for Month 2 and Month 1 Account Executives and their respective quotas. Again you will multiply the respective values and you will add fully ramped, Month 2, and Month 1 MRR to obtain the New MRR calculation.

The value of this work and the future assumptions you’ll enter is the thinking, the conversation, and the testing that will help you drive clarity around what the revenue operations can look like.

Once complete you’ll have your top line ARR populated.

From the marketing lens

Let’s now move to the Marketing Lens.

Calculations

  • The Annualized Recurring Revenue (ARR) will be 12 times the End of Month (EOM) Monthly Recurring Revenue (MRR) Install Base. We are going to use this to compare against the top line from the Sales Lens when we’re done.
  • The End of Month (EOM) Monthly Recurring Revenue (MRR) will take the Beginning of Month (BOM) Install Base and add the Net MRR from the month.
  • Net MRR is a calculation of Churn MRR subtracted from the New MRR.
  • New MRR is a calculation of sales rep quotas based on ramp (new vs. full quota account executives).
  • In the Marketing Lens New MRR you can decide where the revenue will come from: email marketing, content marketing, outbound calls advertising. Let’s use content marketing for this walk through.
  • MRR from Content Marketing Appointments will be a multiplying Average MRR/Customer from Content Marketing Appointments by Customers from Content Marketing Appointments.
  • Content Marketing Appointments will be the number of Content Marketing Leads times the value of Content Marketing Lead to Appointment Conversion %.
  • Churn MRR is a percentage of the BOM Install Base. Basically, you’re holding an assumption of churn each month. If you have quarterly, or annual contracts you will adjust.
  • EOM MRR Install Base will be the BOM MRR Install Base plus the Net New MRR.

Assumptions

Again, as you can see, most of the values in the model are calculations. Now we’ll move on to the assumptions.

From the top, we will start by entering the value for BOM MRR Install Base.

Next you will enter the values for Average MRR/Customer from Content Marketing Appointments, Content Marketing Appointments to Customer Conversion %, Content Marketing Leads, and Content Marketing Lead to Appointment Conversion %.

If content marketing is your only marketing strategy you're done. If you have others (see template) you can populate the value for them as well.

Expenses

While this is not the financial model you can start to create line items for Sales Expenses and Marketing Expenses and headcount. These are all assumptions you will enter that can give you a sense of how much spend you’ll have for varying roles. You can develop key ratios between individual contributors and managers, total marketing expense per Account Executive, amount of MRR demand generation per Account Executive, and so on.

Today I want to discuss building an operating model for your business.

Applying the model

The insights from the operating model allow you to test and iterate on hypotheses. Recently, with one of our strategy consulting clients in the mental health space, we are testing and iterating on an outbound cadence to add subscribers to a newsletter.

The newsletter in essence is the product. The client is buying attention and in return offering tactical value. Yes, they will still position the newsletter to help them acquire customers, but the primary objective of this product is drive value and this will be the key to the success of the product. The client doesn't fully know where their customer is in their journey and most of them are likely gathering information. That’s okay, they want to be part of the customer’s mindshare early.

The newsletter itself has some great flywheel effects. Externally if it's good it will be shared and make the rounds. Internally, however, it allows our client to think through what they are learning and what topics are most relevant to our client (including their readers). A lot of B2B SaaS companies sit on data and insights. These are perfect to share. While it might not be perfect for every reader, sharing the insights provides a glimpse to most readers into what is possible.

At RevPipes we know that at least three to five percent of people that a B2B SaaS company emails will subscribe to an offer for a newsletter. We also know that if we can drive value to these readers that they will eventually be in the market to purchase other products. This is the upsell. Each product they purchase has its own unique characteristics and offers a unique value proposition.

From the description of the operating model above, you can see how all of this is, or can be modeled out. This will naturally lead to questions about market size and ideal customer profile, how much to spend on acquiring readers, and assumptions of how many will continue their journey with our client become meaningful.

Conclusion

The operating model helps us understand what growth levers marketing can adjust and what growth lever sales can adjust. It helps us have discussions around Bottom-Up, Top-Down, Product-Led, etc.

Internally with the RevPipes’ Strategy Consulting practice we use a sales approach with average revenue per customer being greater than $20,000. For our marketing approach we use referrals, email, content, social media, and ads to drive awareness and offer lightweight products where the average revenue per customer may be sub-$2,000.

The operating model allows us to take our assumptions and our conversion rates across products and revenue streams to better understand Customer Retention, Profit Margin, Lifetime Value, Churn, and other SaaS metrics that are important to each business.

Most of the math will be done by the spreadsheet. You’re working through your assumptions and seeing what’s real and what’s not.

Revenue Acceleration becomes easier when you have a plan and the Operating Model is a great starting point for planning and conversation.  Once you understand the drivers on a customer level, you can organize your strategy to better determine where you want to laser in on.


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