By Pat Hinds
I had lunch with a friend of mine this week who had just been laid off by a small company that was having financial issues in this economic downturn; his role at the company was VP of Sales. I have known this person for over 10 years and we have each had successes and failures in our respective sales careers. The company he was working for had built a service product and had secured some large companies resulting in a recurring revenue stream. Nevertheless, my friend explained to me how the company overextended itself by investing money into new products prior to understanding the market opportunity and customer adoption.
As we ate lunch, I could not help but think about a book I had finished reading earlier in the month called, The Art of War. In chapter two of the book entitled, Mobilizing Armed Conflict, Sun-Tzu wrote: “A country can be impoverished by its troops when they are far away.” The company my friend was working for is a classic example of a company that diversified its products too early, resulting in starving cash from their core service offering. A similar thing happened to me when I was the VP Sales at a satellite service provider; we had a great market in the oil & gas industry in Alberta but we made a move to Vancouver and Toronto prior to understanding the market. We funded the sales efforts in Toronto and Vancouver for an entire year; this depleted our cash reserves to a point whereby we either had to shut down the remote offices or go out of business.
It is very important that companies evaluate market opportunity and market share of its core service offering; and prioritize a plan to grow market share before even thinking of launching a new product. One of the key learnings from the cellular industry is the importance of understanding cost of acquistion (COA). Adding a new product to take advantage of an opportunity may add top-line revenue to a company, but can hurt the bottom line due to the high cost of acquistion of a new product offering. In these tough economic times, companies need to take the time to understand how much revenue can be generated with its existing products in its target market and put a plan together that will allow them to achieve the leader position for market share. This will result in a cost of acquistion that will be much lower leading to a positive cash flow.
Topics: Business Intelligence