Framework library · Growth strategy
Revenue bridge
A revenue bridge starts from one period's revenue and walks to the next in steps, each a separate cause: price changes, more or less bought by customers you kept, the shift between higher and lower priced products, revenue lost with customers who left, and revenue from new customers. Flat revenue often hides large movements that cancel each other out, and the bridge shows them.
Use it when
- Revenue has been flat for several quarters and the explanations in the room conflict.
- You need to explain a year's change in revenue to a board in terms of causes rather than product lines.
- A price rise has gone through and you want to see whether customers leaving offset it.
- You are building a growth plan and want to know which lever moved most last year.
Avoid it when
- Revenue cannot be traced to customers, as in some wholesale or channel sales. Use product-level price and volume variances instead.
- The question is profit rather than revenue. Build the bridge on contribution, or build a cost bridge alongside it.
- One-off items, such as a large equipment sale, dominate the change. Take them out and show them as a separate step first.
How to run it
Fix the two periods and the revenue basis
Last year and this year, for example, both on recognised revenue and with one-off items taken out.
Split customers into kept, lost and won
Kept customers were billed in both periods, lost ones in the first only, won ones in the second only. Every customer falls in exactly one group.
Measure the price effect on customers kept
Revenue change from price on the same products: list price rises, discounts ending, discounts given.
Measure volume and mix for customers kept
Volume is more or fewer lines, seats or units bought. Mix is movement between higher and lower priced products. Enter it as negative when customers move to cheaper ones.
Enter revenue lost and won
The first period's revenue from customers who left, entered as a positive number, and the second period's revenue from new customers.
Check that the bridge closes
The end revenue from the bridge should match the actual figure. A large residual means one of the steps is measured wrongly. Fix it before drawing conclusions.
Work through it
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Mistakes to avoid
- Netting customers lost against customers won. A business that loses 12% of its revenue and wins 12% looks stable and has a serious problem.
- Counting a price rise as growth without checking whether it shows up as customers lost a year later.
- Leaving a large residual unexplained. If the bridge does not close, the conclusions are not safe.
- Changing the order of the steps between reports. Price, volume and mix effects depend on the order they are taken in. Fix the order and keep it.
Where it comes from
No single originator. The bridge applies the sales variance analysis of management accounting, which separates a change in revenue into price, volume and mix effects, and draws it as a waterfall. Splitting volume into customers kept, lost and won adapts it to businesses that bill customers repeatedly. Source.
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