Revenue Operations | 6 minute read

How the Business Model Affects Metrics and Profitability

Posted by Adam Statti on October 24, 2022

RevOps Metrics

John Wooden, Hall of Fame collegiate basketball coach and winner of ten national championships, once said, “It’s the little details that are vital.  Little things make big things happen.”  

Successful businesses heed this advice.  For the ones that aren’t successful, it’s often the little details that prevent revenue growth.  Misjudging your companies win rate by a single number (e.g. 1:3 vs 1:4) or being just a few months off in average sales cycle length can have massive implications.  

Each unique business model (Ownership, Subscription, Consumption) has an effect on the following RevOps metrics:

  • Sales cycle
  • ACV (Average Contract Value) 
  • Win rates
  • Risk profile
  • Area of focus

The Business Model

 

Because the various types of business models exist on a continuum, the greatest differences in these metrics will be seen on the opposite ends of the arc, which are represented by the ownership and consumption models.  

Effects of Various Business Models on:  Sales Cycle & ACV 

Ownership Model 

Bottom line up front:  if you work in sales in an ownership model-type business, it’s time to put your workin’ boots on!  The ownership model, which operates primarily through large, upfront payments, has a sales cycle typically ranging anywhere from nine to eighteen months (this is, in contrast to other models, very long).  With reference to ACV, these are typically very large accounts that already have budget approval.  

These factors will have a dramatic effect on sales team structure and approaches to sales ramp time.  When a deal takes a year or longer to close, decisions related to how you decide to ramp and pay your sales team can be precarious at best. 

Sales meme

Subscription Model 

Welcome to consistent inconsistency.  The diverse payment structures (multi-year, annually, quarterly, or monthly) employed by the subscription model are reflected in the wide ranges of the sales cycle and ACV.  

The sales cycle can range anywhere from six months to two weeks, correlating to multi-year contracts and monthly subscriptions, respectively.  When it comes to ACV, how people are buying and how large those contracts are will often be totally different.

Consumption Model 

Because the consumption model has a sales cycle that can literally be in the seconds range (don’t even try to calculate ACV, it’s virtually non-existent), a sales team is not even necessary.  This model employs product-led growth (PLG) where your product quite literally is the sales team.

Effects of Various Business Models on:  Win Rates

When it comes to win rates, not all models were created equal as the rate at which a deal closes can vary considerably from one model to the next.  This can be due to a variety of factors, but the result is a win rate that decreases as the length of the sales cycle also becomes shorter.   

Ownership Model 

In the ownership model, the deals are quite large (in the millions) because the purchases are typically being made years apart.  As such, a buyer is often required to have a budget secured before they even begin the buying process.  

In fact, many of these deals are RFP’s (request for proposals), where a project has already been announced, described, and had bids solicited.  Due to these factors, the win rate is quite high, 1:3.  When DJ Khaled said, “All I do is win, win, win, no matter what”, he just might’ve been talking about the ownership model.  

Subscription Model 

The win rate drops to 1:5 in the subscription model.  The primary reason for this is that the shorter contract lengths make it easier to buy, resulting in generally less qualified customers.  To help ensure the win rate doesn't dip below 20% on a consistent basis, better discovery calls and sophisticated qualification metrics are needed.

Consumption Model 

Due to the vast array of free services that the consumption model offers, it has the ability to attract many potential customers.  The issue is many of these potential customers remain just that, potential customers.  

When you offer a free service and sometimes only charge when an upgraded version is requested by the customer, many will not choose to pay.  This results in a very low win rate (1:8) in this model.

Effects of Various Business Models on:  Risk

When it comes to business models and risk, there is a wild swing from one side of the model to the other.  Whoever is assuming the risk in the purchasing relationship (the buyer or the seller) obviously has much more to lose in the transaction.  The concept of risk helps a business prioritize their time and zero in on where they should be focusing their efforts.

Manage risk meme

Ownership Model 

In the ownership model, all of the risk is assumed by the buyer.  A bad purchase (yes, sometimes even million dollar products don't work) can result in the firing or a demotion of the buyer, as these purchases can’t be returned.  

In contrast to this, the seller assumes literally no risk and is celebrated for securing a huge deal.  High fives and champagne all around.  In addition, there is virtually no work on the back end for the seller.  

The seller does not need to worry about upselling or renewals, because they sold a product that typically is a once-in-a-five-year purchase.  Customer service?  Not even once.

Subscription Model 

The subscription service model changes this dynamic.  In this model, the buyer can walk away and get out of a contract with small termination fees and there are also non-binding contracts (month-to-month) with opt out periods.  Subscription model businesses often will have to wait six to twelve months before realizing a profit from a customer.

Consumption Model 

Taking it one step further in the direction of seller-associated risk is the consumption model.  In a complete reversal of the ownership model, the seller is now assuming all risk, while the buyer, who can stop at any time, is taking on virtually none.  While deal velocity is accelerated in this model, sellers are constantly under pressure to get more users.

Effects of Various Business Models on:  Focus

Ownership Model 

In the ownership model, the focus is entirely on selling and closing deals.  Period.  Very little needs to be done in the realm of post-customer (well, maybe the occasional Christmas card) as the products being sold won't need to be renewed for another five to ten years.  Meaning:  all sales, no customer success.

Subscription Model 

For the subscription business models, it’s a different story. 

RevPartners CRO Matt Bolian puts it this way:  “You don't make money on selling contracts, you make money on recurring impact on the right side of the bowtie funnel.” 

It’s less about the number of customers, and more about how long you've kept them.  This means you must focus on both sales and customer success.  

Consumption Model

Once again, the consumption model turns the concept and focus of the ownership model on its head.  This model utilizes product-led growth and has very little to do with the sales function.  With a specific focus on customer retention, this model essentially relies on two things:  driving an immense amount of deals and having a good product.  Customer success drives all of the revenue here.  

Details Matter

Long term profitability is often a function of attention to detail.  Understanding how each business model affects various RevOps metrics is essential for a company's stability and health.  

If you find yourself struggling to maintain that John Wooden-esque level of managing all the particulars, then contact RevPartners and let our team of highly-skilled strategists turn the little details into big results!  We only win when you win!     

 

RevPartners is at Your Service

Sustainable revenue growth.  Everyone wants it, but few actually achieve it long term.  It’s all about doing RevOps well, and that’s where RevPartners comes in.   

We offer RevOps as a service to help you replicate and repeat revenue growth and answer, prioritize, and navigate RevOps maturity.  Let us be your RevOps team.  We only win when you win.

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