What are revenue enhancing synergies?
Revenue enhancing synergies are when the revenues increase from being in both areas, relative to separate firms. Combining two companies into one results in higher sales than if both firms were separate.
Revenue enhancing synergies, for example, come from the cross-promotion between the brands – customers more likely to buy either product because of its association with the other. Or you may be able to cross-sell items across different distribution channels – if one firm has strong sales in one region, and another in a different region, then there may be opportunities for selling each others products in different markets, again resulting in higher sales than if both areas were separate comapnies.
What are cost-saving synergies?
Cost-saving synergies in comparison come from savings that can be achieved by reducing duplication across the different areas. It may be cheaper to run both firms if they are combined as a single company than if they were run as a separate firm. There may for example be areas that both firms do, that by combing the companies, you are able to reduce by combing those functions into one.
Key differences between revenue synergies and cost synergies
While the primary difference between revenue-enhancing synergies and cost-saving synergies comes from where the benefit comes from – either increasing revenue or reducing costs – there are also some more subtle differences that can distinguish the different approaches.
Will the savings require layoffs?
The first difference concerns whether achieving the synergies are likely to require layoffs within the firms. In cost-saving synergies, one of the key reasons for benefits comes from the reduction in duplications – typically headcounts. Revenue enhancing synergies on the other hand is much less likely to result in layoffs – the key goal is unlocking new sales, rather than savings.
Uncertainty regarding whether you will achieve the synergy benefit
Another subtle difference is how easy it is to predict in the advance the synergies. Cost-saving synergies are often more easy to calculate. Companies for example can identify duplication, and in turn calculate the specific savings that may be achieved. While of course achieving these savings is not necessarily easy, firms can get a ball-park estimate in advance of the likely benefits.
In comparison, revenue-enhancing synergies are often more speculative in nature. It is possible that you may for example be able to develop a new product by combining the technologies of both firms – but just like product development in general – there is a lot of uncertainty regarding whether that product will ever materialize. A new product may be a big hit, or it may never make it to market. Similarly, if we consider cross-selling the goods via different distribution channels, this may be a big possibility, or it may be that distributors don’t agree to take on the products that you were hoping that they would. The potential benefits may be big, but there may also be big uncertainty.
Related Articles
