Revenue Drivers & Cost Structures

The “Why” (Driver-Based Analysis - Beyond the Numbers)

Financial statements tell you what happened, Drivers tell you why it happened

Internal Drivers (Driver-Based Analysis - Beyond the Numbers)

Pricing strategy, sales team headcount, new product launches

External Drivers (Driver-Based Analysis - Beyond the Numbers)

Interest rate, consumer confidence, commodity prices

Price (Revenue Decomposition)

The ability to raise prices without losing customers (pricing power_

Volume (Q) (Revenue Decomposition)

The number of units sold or services rendered

Mix (Revenue Decomposition)

The proportion of high-margin vs low-margin products sold

New Logos (Customer-Centric Drivers [Saas/Subscription Focus])

Acquisition of new customers

Retention / Churn (Customer-Centric Drivers [Saas/Subscription Focus])

The percentage of clients who cancel their subscriptions

ARPU (Average Revenue per user) (Customer-Centric Drivers [Saas/Subscription Focus])

The value of each customer

CAC (Customer Acquisition Cost) (Customer-Centric Drivers [Saas/Subscription Focus])

Marketing spend required to gain one customer

Definition (Variable Costs - The Scalable Expenses)

Costs that fluctuate in direct proportion to changes in volume

Key Components (Variable Costs - The Scalable Expenses)

Raw materials, direct labour, shipping / freight, and sales commissions

Contribution Margin (Variable Costs - The Scalable Expenses)

Calculated as revenue - variable costs, this is what is left to contribute to covering fixed costs

Definition (Fixed Costs - The Hurdle)

Costs that remain constant regardless of production levels, within a relevant range

Key Components (Fixed Costs - The Hurdle)

Rent, executive salaries, depreciation, and insurance

The Risk (Fixed Costs - The Hurdle)

High-fixed costs increase the “Break-Even Point”, if sales drop, fixed costs remain, leading to rapid losses

Operating Leverage Definition (Operating Leverage - The Profit Multiplier)

A measure of the ratio between fixed and variable costs

High Operating Leverage (Operating Leverage - The Profit Multiplier)

Small increases in revenue lead to disproportionately large increases in EBIT, common in Software / Saas).

Low Operating Leaverage (Operating Leverage - The Profit Multiplier)

Profit grows at the same steady rate as revenue, common in Service / Consulting

Purpose (Sensitivity Analysis - “What If” Modeling)

Testing how sensitive Net Income is to changes in specific drivers

The Test (example) (Sensitivity Analysis - “What If” Modeling)

What happens to profit if raw material costs (variable) rise by 5% and we cannot raise prices