There are two ways to increase the value of a company, grow the top line and shrink the bottom line.  Increasing sales to generate revenue and growing the top line increases value far more than cutting costs.  Operational efficiencies are important and lead to better cash flows, but look at any financial model of a company, the returns generated from a small increase in sales growth are much larger than the returns from a large reduction in costs.  Increasing sales is far more difficult than cutting costs, but in the long run, the efforts pay off in multiples.

A good revenue growth strategy will focus on the number of customers, the number of products or services offered to each customer, and the transaction frequency with each customer.  Deciding which one of these is the top priority is determined by the nature of the industry and stage of the business.  A company that has fully saturated a market, or one with lots of competition, might have to offer new products to existing customers, or a service that goes along with the products, as opposed to a smaller company in a growing market that should focus on reaching out to potential customers.  Regular outreach could remind customers to repeat their purchase, like reminders to change engine oil or get another massage.

The type of sales and marketing efforts depend on the customer and product.  A sales effort that is not cost-effective is a quick way to destroy value because gross margins matter in the long run.  A company with a mass market product could use a mass market campaign, commercials, direct mail, sales calls, and print ads, which take a long time but eventually, the brand recognition will help convert a percent of the population into customers.  Mass market refers to regional or national, depending on the business, just that anyone can become a customer.  Targeted ads and sales outreach are great for higher-end and specific products in business-to-business sales.  It would be inefficient to take out a billboard to reach the buyer of enterprise software in chemical manufacturing.  Selling more and different products to existing customers is another way to grow, so make sure to market to people that have already purchased.  This usually gives a business the highest return on investment.

If increasing revenues by offering new products, or ramping up marketing efforts do not work, the other option for increasing revenues is external growth, or finding companies to acquire.  In addition to an acquisition or joint venture, external growth could include distribution or manufacturing deals with outside companies.  The benefit to joint ventures and acquisitions is that revenue grows quickly.  Large company CEOs prefer this option, even if it destroys value because their compensation is tied to the size of the company.  Unfortunately, a lot can go wrong with a merger.  An often-cited statistic is that 70% of all mergers end up destroying value for shareholders because projected synergies don’t often pan out.  These results were supported by McKinsey’s M&A research that suggests most mergers fail due to planning and execution.

Increasing sales create more value because of the compounding effect.  Costs of operations are cut one time, and then continue to grow as the business grows.  Each cost reduction does not continue to decrease year after year as sales do in the opposite direction.  Sales growth compounds on itself and growing the same percent on last year’s sales is an even larger absolute number.  Keep this in mind when determining the priorities of the business.