Your Team Doesn’t Have a Definition of Revenue. The truth is, they have five (that's four too many).
"How much revenue did we make last week?" - "450.322 €." - "Are you sure? I got the info from accounting that it is 368.433 €." - "Huh? Nah, I'm sure. In the sales report, it is 450,322 €." - - - "Sorry to interfere, but I just overheard your conversation: In marketing, we just talked about it: It's 476,510 €." - "Sorry folks, but this can’t be happening! I do not ask for magic tricks here, I just want to know how much we billed for last week!" - "Billed for? Well, that was 398.675 €." - "..................!!!!!!!!!"
A scene that is likely to happen almost daily in conference rooms, offices, and canteens of retailers around the world. I, too, have experienced this, or something similar, countless times – with customers, but also in my own company. "Revenue" as a term sounds so harmless; it pretends to be the simplest measure in the world. But the opposite is the case: there is no key figure that is trickier to define than this one.
The Key Figure That is Actually 20 Key Figures
Sure, we all know where the skeletons are buried. There are several types of revenues, it's that simple. But if we all know this, why is there still so much chaos? My theory: It simply fails because of sluggishness. Very few companies seem to be particularly motivated to face the challenge, instead pursuing the "If I ignore the problem long enough, I'll forget it's there at some point" principle – and forget (or ignore) the fact that a forgotten problem is not a solved problem.
The consequence of this is the practice that is performed in many companies even today, that each department has its very own definition of revenue. Marketing wants to attribute as much campaign success as possible and therefore uses the revenue, which according to our definition (see below), would be described as "merchandise value in orders", in other words, everything that has been received in any form as an order. Sales is a bit more down to earth and identifies as revenue what was actually sold (at least in the first step), namely the merchandise value in sales – cancellations have already been deducted here. Accounting, of course, does not care at all about such embellishment and treats net revenue as primary revenue, so it also deducts the returns. Well, and if the boss then asks how much has been invoiced, he or she opens the next can of worms: Suddenly, the word "revenue" refers to the invoice date instead of the order date – which in turn affects almost all (and more) of the aforementioned "revenues"... who can keep track if the underlying terminology for all these various figures is limited to exactly one term?
Specifically, the dangers of inconsistent key figure terminology lurk in the following three areas:
- Key figures are (at least ideally) not only there for information, but above all for decision-making. Incorrect numbers (or misinterpreted numbers) can easily lead to decisions that are also incorrect.
- Comparing apples to oranges has never made sense in any context – as in this one: When Marketing compares its monthly "revenue" with the Accounting "revenue" of the last month, and is pleased about the supposedly positive development, no one really has any reason to be happy (except for the consultant, who has a lot to consult here).
- In the comparatively better case that the participants realize that their fruit basket is not just apples, the next problem arises: time-consuming specification of the respective underlying definitions or heated discussions about right and wrong. This means: idle, lengthy groundwork before coming to productive discussions on substantive issues. Unfortunately, the reality in many companies is that these discussions recur on a regular basis and yet their impact does not extend beyond the end of each meeting, because no one takes initiative and does the (admittedly laborious) task of organizing the chaos once and for all (in the long term!). Such conditions cost a lot of time and are highly inefficient.
The Matrix of Transaction Metrics
We also asked the question of how this situation can be remedied in the context of the "Commerce Reporting Standard" project that we (minubo) launched – and we have taken action: From the best practices of the minubo data model with additional input from other project partners, the following matrix of transaction metrics has emerged, which sheds light on how the individual types of revenue actually relate – and makes a concrete (and, in my opinion, very conclusive) terminology proposal.Here's a hint: Although it is based on best practices in commerce, the suggested terminology of course differs from internal company terminologies in many cases. But even in these cases, it at least provides, as a kind of translation layer (or: communication aid), great added value, which illuminates the area of transaction metrics in its entirety and brings it into a consistent order.
With this matrix, we could subsequently also help many customers to better understand the systematology of the types of revenue or: of the transaction metrics in total – including the various underlying time references.
The following reading material explains the matrix very clearly from different perspectives, in my opinion:
- The Matrix in its final form – with additional explanations:https://commerce-reporting.com/results/transaction-metrics/
- Derivation of the model of transaction metrics: https://commerce-reporting.com/discuss-transaction-metrics/
- Explanation of the different time references (order date, invoice date, return date): https://commerce-reporting.com/discuss-transaction-metrics-time-references/
- A slightly more concise explanation of the most important revenue types in a guest article by minubo in the Händlerbund blog (in German only): https://www.onlinehaendler-news.de/online-handel/praxistipps/31047-gastartikel-was-ist-eigentlich-umsatz
I would be glad if the presented systematization can help one reader or another. Apart from that, I am always happy to receive direct questions and feedback – just contact me at mailto:email@example.com and I'll get back to you as soon as possible.
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