Referenceable Revenue is the first of the three categories of revenue, followed by Scalable Revenue and Profitable Revenue, which are discussed in other articles in this series. Referenceable Revenue is defined as sales to outside, unrelated individuals or companies that purchase, pay for, use, and are satisfied or delighted with your product or service. Their actions show what other people actually do, not what you or they say about your product or service. It is the cornerstone of external validation.
Although you can assume you have designed a product or service that meets prospects’ requirements, you cannot be sure until customers have purchased and paid for your product. Ideally, customers will have repeatedly purchased it or provided positive recommendations to others who have also purchased it. It is easy to mistake interest and encouragement from others to be validation that your concept is fulfilling a market need that prospects are willing and able to pay for now. Even the results of free trials or willing very early adopters can lead to improper conclusions about the validity of your product or service assumptions.
Finally, even the initial wave of customer orders can be misleading. A good example is drawing conclusions from a new restaurant’s first month’s receipts. They can be very encouraging, but the real metric is how many customers return or recommend the restaurant to others. In most cases, the restaurant never hears from those less-than-satisfied patrons. With new customers, silence is NOT necessarily golden. No conclusions - positive or negative - can be drawn from silent customers.
Basing market acceptance conclusions on free trials, lab trials, or beta site deployments is often equally misleading. In these cases, “customers” are often less than objective and may have a tendency to overlook or rationalize shortcomings. Although they may commit to spend time evaluating the offering, with no financial commitment they may not be objective or thorough. Further, in many cases, the individuals that are anxious to try the product or service may not be authorized to make a purchasing decision. As an alternative, asking prospects to commit to a conditional sale can provide a good test of the ability and willingness of a company or individual who is interested in trying the product or service. The terms of the conditional sale should be very simple. A one or two-page document is all that is required that specifies the period of the trial and the criteria to determine acceptance, along with the agreement to finalize the sale document unless the customer unilaterally decides not to move forward. The unilateral decision by the customer should contain only one clause: the customer must provide the reason that they have not decided to move forward. From a GAAP revenue recognition point of view, a conditional sale is treated the same as a free trial - not recognizable. However, from a psychological perspective, they are very different. For a free trial, the purchase decision is made at the end of the trial; perhaps by others who were not involved in the trial. For a conditional sale, the purchase decision is made at the beginning of the trial with a unilateral, no risk “out clause”. The conditional sales approach is essentially a “blink test” to help ensure the serious intent of the prospect and their ability to commit to the sale.
So, to obtain referenceable revenue, four critical steps are required. First, independent customers must purchase and pay for the product or service. Second, specific candid customer feedback must be obtained. Third, customers must use the product or service in their business, preferably weaving it into the fabric of their operations. Fourth, those customers must be willing to “go on the record” and be willing to tell others that their expectations were at least met and hopefully exceeded.
Until the fourth criteria – testimonials - are obtained, referenceable revenue, by its own definition, has not been achieved and the next phase of focusing on Scalable Revenue should not be pursued. Remember, it is not what you think, it is what customers actually do and then what they say about your product or service that counts.