As a business owner or leader, you’re constantly juggling multiple sales channels and go-to-market strategies to drive revenue. You may have a direct sales force, an e-commerce website, distributors or value-added resellers, affiliate marketing programs, and more.

But do you really understand which channels are your highest performers versus underachievers? Which sales motions yield the best profits and ROI after factoring in their respective costs and overhead? Analyzing your books through the lens of your various sales channels can reveal powerful insights to strategically realign your resources for maximum impact.

Here are some key steps for using accounting and financial analysis to evaluate the effectiveness of each sales channel in your revenue portfolio:

1. Implement Robust Revenue Tracking and Tagging

The first step is to ensure your accounting system is set up to accurately track and categorize all revenue streams by the specific sales channel they originated from. This could involve tagging income sources in your accounting software, deploying unique pricing SKUs/product codes for each channel, or leveraging integration tools to seamlessly map revenue data across systems. Having this ability to attribute all income to its source channel is critical.

2. Map Channel Costs and Overhead

For each channel, you’ll need to identify and allocate all of the costs and overhead expenses associated with operating and maintaining that revenue stream. Some examples:

• Direct sales: Payroll and commissions for sales reps, sales tools/subscriptions, travel and entertainment
• E-commerce: Website hosting, payment processing fees, shopping cart software, marketing spend 
• Resellers: Channel sales management, deal registration, partner program costs
• Affiliates: Affiliate commission payouts, affiliate management software

Correctly categorizing these costs by channel will allow you to calculate the fully loaded expense of each sales motion.

3. Conduct Profitability Analysis

With your revenue and expense data cleanly tagged to each respective channel, you can run detailed profitability reports to analyze the true contribution to profit from each sales channel. Key metrics to examine include:

• Total revenue
• Cost of goods sold (COGS)
• Gross profit
• Sales and marketing costs
• Operating expenses (payroll, overhead, etc.)
• Net profit
• Gross and net profit margins

This analysis reveals which channels yield the highest profits, profit margins, and ROI after covering all their costs and overhead. You can identify your “hero” channels that merit increased investment as well as underperformers that may need to be optimized, de-prioritized, or cut.

4. Customer Lifetime Value and Acquisition Costs

Evaluating sales channels based on simple profitability is just one dimension. You’ll also want to layer in customer lifetime value (LTV) and customer acquisition cost (CAC) data to understand the long-term value and payback periods of each channel.

Channels with higher upfront acquisition costs (like direct sales) may actually deliver stronger profits over time due to higher LTV and longer customer tenures. Conversely, some cheaper demand gen channels may have lower upfront costs but generate more churn with shorter customer lifespans.

5. Optimize Your Channel Mix

With robust channel profitability, CAC, and LTV data in hand, you can make highly informed decisions for optimizing your sales strategy and budget allocation across channels. For top performers, you may want to ramp up investments in areas like headcount, marketing, better tools/technologies, or new program incentives. For underperforming channels with low margins or ROI, it could make sense to trim resources and instead reallocate those dollars to your most profitable sales motions.

6. Establish Performance Benchmarks, Forecasts, and Goals

An accounting-driven channel evaluation equips you with baselines to then set goals and benchmarks for where you need each channel to be in terms of revenue, cost ratios, growth rates, and overall financial performance. You can build driver-based forecasts for how adjusting spend or headcount in each channel is projected to impact overall company revenue and profitability. Continuously measure actual results against your targets to identify issues or opportunities to reallocate resources.

In our data-driven world, there’s no room for assumptions or gut feelings about which sales channels are truly pulling their weight. Rigorous financial analysis and accounting best practices allows you to slice and dice your revenue streams through an impartial numerical lens. By digging into each channel’s economics, you can make precise, profit-optimizing decisions about where to double down with investments versus pivot to alternate strategies. Leverage your financial reporting as a compass for maximizing revenue performance across all of your sales motions with Silicon Valley Accounting Solutions.