Revenue as a value disrupter
Money is a great yardstick for success. It just can’t be the only one.
When we study great companies and innovation, we tend to look at the numbers and stand in awe of their profitability and success. We measure success with revenue and it makes total sense that we do: companies depend on profit to sustain themselves. It is the easiest, most transparent measure of success.
Take Walmart for example. In 2016, the Walton family was worth 13 billion. An empire created by Sam Walton, a self-made man, an embodiment of the American dream. Walmart’s success is certainly based on its focus in making the company profitable, right?
It’s surprising to learn that Walmart thrived during the extent of Sam Walton’s life with one idea that represented what the company valued: people. Walton believed that if you cared for the people, they would care for you. That is very similar to Southwest Airlines’ Herb Kelleher’s idea that happy employees make happy customers, and happy customers make happy shareholders, in this order. After Walton’s death — the man who never took a salary over 350k/year albeit being the richest man in the US — Walmart stopped focusing on caring for the average man as their paramount value, and shifted to a pragmatic view of management that set profit as a primal goal. Money became value, and not a byproduct of it.
Is that a bad thing?
In comparison, Costco managed to maintain the right value at the core of its business. When questioned about his managerial decisions and prioritizing employee over stakeholder satisfaction, Jim Sinegal said “Wall Street is in the business of making money between now and next Tuesday. We are in the business of building an organization, an institution that we hope will be here fifty years from now.” We see two similar companies — Walmart and Costco — with one big difference between them: Walmart, at some point, set profit as its measure of value. Costco has maintained the idea of “people first” as its measure of value. If anyone invested both in Costco and in Walmart on the day Sam Walton died, that person would have earned 300% on its investment in Walmart, and 800% on its investment on Costco in the course of 9 years¹ .
As it commonly occurs in our well-intended, ill-executed irrational predictability², we mix the concepts of causality versus correlation. As a product owner for digital applications, I have been extensively trained to order my product backlog (the list of features I want my development team to deliver) based on the projected revenue each feature would afford. However, I have always felt entrapped in the conundrum of the stakeholders’ and the users’ needs and how they don’t always point to what will bring more revenue. What Walmart vs Costco shows me is that revenue is not the right unit to measure value, but a byproduct of aggregating value that must be considered at all times because it defines a product’s sustainability.
To be good, do what you do well. To be great, know why you do it well.
If revenue, albeit necessary, is not the right measure of value, then we must define how to measure value in a way that makes sense. What becomes obvious is that there is no single measure of value that will work in every case, because the core value of each company or product is different in itself. In Continental Airlines, when Gordon Bethune started as CEO, he instated a policy that would incentivize the whole company and bring it together around the value of employee’s trust and teamwork, using the on-time flight as a measure for that value. As a byproduct of that measurement and incentive, the company cut 2,5MM in losses ¹— and therefore became more profitable.
Money is like manure. It’s not worth a thing if it’s not spread around, encouraging young things to grow. — Horace Vandegelder, Hello Dolly.
“Being profitable” is a byproduct of adding value to someone’s life, and pursuing it as a core-value can bring positive results in the short term, but will backfire in the mid-long run, and will lead you into making the wrong decisions. So how do you measure value when you can’t trust profit to light your path? My biggest challenge while building products is to figure out what value that product and its team are trying to bring to reality. Why is this important?
To sleep, perchance to dream
The answers are very often philosophical and vague — and they should be. “We are delivering information” for a radio news app,“we want customers to feel they are cared for” for a CRM platform or “we want to enable access to superior education” for a web enrollment site seem like great aspirations, but without them, measuring value becomes impossible.
After you have secured that why and you can resonate it through the team, or teams, or the 20,000 employees of a company, all measures of value must point to that why, and you can build a path to fulfill that why, having profit as a byproduct. And you are free to choose (as Bethune did), any metric that is aligned with that why.
No metric? Don’t panic.
If you work in a consulting company (and therefore must discover a client’s why every time you have a new project), or if finding one single metric to make your why tangible is hard, you can also make an experience. After years dwelling in the dark, muddy waters of measuring value by revenue, I have developed a methodology to provide value measurement when you don’t have one single metric to apply to your list of features (or your action plan, or anything you want to do). It’s called RUT, and you can see more about it here and my first thoughts as I started presenting the tool here.
What’s most important is that you never lose connection with that core value, the reason that guides all metrics, all team-members, all stakeholders and yourself. You can call it “a ding in the universe”, your reason to come to work everyday, your drive, your passion. Just make sure it’s there. Both for you and for the work you do.
That is real value.