Revenue Seasonality: Learn the Basics

Explaining and Understanding Revenue Seasonality

Different industries have different sales cycles and patterns on when revenue is at its highest and lowest point in a given calendar year.

For instance, retail companies typically have stronger calendar year-end sales periods or periods that follow traditional holidays, like Christmas.

This is due to the fact that consumers are purchasing more goods in November (i.e., Black Friday post Thanksgiving) and December (i.e., for the Christmas holiday).

Other companies, like software and technology businesses, will also have larger sales and revenue periods in Q4, as businesses make technology purchasing and budget decisions at the end of the year once they have a handle on their annual budgets and budget resets for the following calendar year.

But not all businesses, even in the same industries, follow the same seasonal patterns in their revenue and sales.

Every organization is unique based on when they acquired their existing customers, and how repeatable (or not) their sales are to new customers in the same or different months and seasons in a given year.

So a good best practice to employ when looking at your own business or evaluating investments or other businesses and their financial patterns is to look at how seasonal revenue and sales cycles are throughout a given year.

Let’s learn how to do this and apply it for your operating and investing knowledge.

What is Revenue Seasonality and What is Its Ultimate Purpose

In the simplest terms, revenue seasonality represents how much of an organization’s revenue is generated within a specific period vs. the full year or period you are comparing it against.

The two common time periods you will look at for seasonality are on a monthly and quarterly basis.

For monthly seasonality comparisons and analyses, you will take the revenue / sales an organization generates within a given month and divide that total contribution in the month by the sales / revenue generated in the same annual period.

Similarly for quarterly seasonality comparisons, you will take the respective quarterly revenue / sales amount and divide it by the annual period.

Practical examples of both monthly and seasonality calculations and comparisons are depicted in the schedule below.

Here is the same example data above in graphical format to further illustrate the point about how to visualize and understand an organization’s seasonality:

Right away, you can take away a few key trends from this example organization’s revenue and sales patterns.

Nearly half of its revenue is generated in the last quarter of the calendar year with a large share of it split between the middle two quarters of the year, and very minimal amount in the first quarter of the year.

This is helpful and important as it depicts when a business generates its revenue and helps with forecasting and visibility into when sales and revenue is generated.

But looking at only one year is not enough to determine patterns and usefulness of this data. Assessing more trends over multiple years and calculating seasonality over multiple periods of time to better understand whether or not there is repeatability is important, as it can improve accuracy and drive decisions that are based on observed trends that are common vs. smaller sample sets.

Taking Your Basic Knowledge to the Next Level

With this analytical skill in your toolbox and the basic understanding of how to use it in practice, you may be asking how to apply it and what to do next with this knowledge.

For starter’s, having a good handle on your organization’s or an organization’s seasonality patterns can help guide your staffing levels and investment levels to properly match when your sales and revenue come online.

For instance, if you know that you will have to onboard 50% of your revenue and new sales in the second half of the year, you may decide each year to hire in the first half of the year to properly ramp new employees to help meet customer and sales demand in the last two quarters of the year.

If you know each year that you will have a temporary need for employees in the last quarter of the year (like many brick-and-mortar, traditional retail companies do), you can create a temporary hiring plan to staff your organization accordingly and avoid not being able to support new customers and sales.

Beyond properly staffing and supporting your new revenue coming in, understanding seasonality patterns can help inform other important business actions, like using advertising and marketing strategies and pricing strategies to increase sales in traditionally slower months or change customer purchasing patterns.

This in-depth insight on revenue and sales seasonality can help drive differentiation against some of your competition, who may only depend on seasonal revenue and sales growth.

Ultimately, it can help you drive towards a more balanced and sustainable strategy of revenue and sales acquisition and increases in other periods of a given year, while your competition relies on typical seasonality upswings for the majority of their revenue.

Learn More About Revenue Seasonality and Much More with Valuate

We are creating Valuate to provide business owners, operators, and investors with the interpreted benchmarks, best practices, and tasks to create new strategies and value across their organization.

Revenue seasonality is just one of hundreds of important metrics that organizations need to understand to drive towards decisions, like hiring, budgeting, and go-to-market investment decisions.

You may also be curious at how your business compares others in terms of KPIs like revenue seasonality and what you can do to improve your metrics and trends.

That is why Valuate is here and why our free newsletter and content across platforms (LinkedIn, X, Instagram) exists - to empower you with the knowledge and insight on common business metrics and actions and lead to better data-driven business decisions.

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