When government regulation is removed from a market, history becomes a poor indicator of the future market. Disruption is predictable when increased competition, choice and transparency drive new market entrants who further disrupt revenue models. Assumed loyalty is often the major casualty when comparative analysis is as close as a client’s desktop.
An historical service mindset of ‘appreciate what you get because you have no choice’ conflicts with consumer’s growing ability to choose ‘what best meets my needs’ in a deregulated market.
The resultant disruption threatens revenue and the consequences can be fatal. A failed revenue model is no cause for celebration. Happiness is a positive cashflow.
A revenue model aligns often unstated revenue and expense assumptions to the harsh realities of the deregulated market. Evolving ‘value’ definitions may include different criteria. Features become more visible with transparency. Cost may become more important.
A revenue model makes financial sustainability possible by revising and restating assumptions to make the invisible visible. It identifies which revenue source to pursue, ‘value’ as continually redefined by clients in a deregulated environment, how to price value and who pays for value.
Remaining competitive in times of disruptive innovation requires collaborative thinking using a value stream approach to constraints management, lean thinking and process excellence.
Strategists read the wind by understanding their value proposition, client expectations, buying patterns and competitors to identify the price, features and service changing markets will bear.
A target price objective meets the market to deliver client’s value expectations and a target margin based on costs under various volumes. Target costing utilises business intelligence to better understand client value in a sustainable business model.
Target costing identifies the implications of overhead cost, indirect cost and direct costs. The objective is to set and achieve a price including valued features that delivers a target margin (offense strategy) or target cost (defence strategy).
In regulated markets, overhead is often hidden and can grow out of proportion. In a deregulated market, corporate overhead is transparent and should be examined with rigour and vigour in a target cost target exercise to identify real value to the external client.
Removing constraints and improving throughput by streamlining indirect and direct costs adds value to the extent that value is perceived by the client, improves productivity or reduces cost.
Accounting measures quantitative factors in target costing. Other stakeholders reflect the ‘voice of the customer’ and qualitative factors such as features, benefits, demand and constraints. Strategy, people, and process determine cost and how to increase revenue, margin, flow and throughput.
Understand price elasticity or suffer fatal consequences. Price and cost decisions which fail to meet the market definition of value can lead to lost margin or lost market share or both. Reducing price to prop up an unsustainable business model has direct cost and opportunity cost.
Conversely, price based on informed target cost decisions which understand the market can lead to increased margin and/or increased market share.
Use the flow chart above to assess your revenue model. If you are want a sustainable business model with a strengthened revenue model or a copy of the revenue process map, contact firstname.lastname@example.org or ring John Cleary on 0411 522 521.