Revenue Operations | 6 minute read

What Are The Recurring Revenue Business Models?

Posted by Adam Statti on October 21, 2022

Why is the Business Model Important?

“Who are you? Who?  Who?  Who?  Who?”  These famous lyrics from a song by The Who back in 1978 were certainly not written with RevOps in mind.  However, the question posed (who are you?) is essential for all businesses to answer as understanding your particular business model is the foundation upon which your revenue engine framework is built.  

In its simplest form, a business model involves knowing what your company’s plan is for making a profit.  Knowing who you are, or more precisely, what your business model is, determines:

  •  How you bill 
  •  Who your customer base is 
  •  How you go to market 
  •  How it affects key differentiators and key RevOps metrics

Successful businesses have a comprehensive market plan and know how to leverage each of these factors as a competitive advantage.  This is essential for doing RevOps well.

Business Model Fundamentals

The business model is based on three fundamentals or core premises:

  •   It is vertical agnostic

RevPartners CRO Matt Bolian explains:  “It is important to have vertical knowledge because you understand the players and you understand the ways to make things the most efficient, but vertical matters a whole heck of a lot less than your actual business model in B2B.  Do you have experience in the business model of either ownership, subscription, or consumption?”

  •  It only applies to B2B, not B2C
  •  It exists on a continuum of varying levels of recurring revenue.  An anticipated amount of a company's revenue repeats at specific times (yearly, quarterly, monthly, etc...) based on the various business model examples. 

3 Types of Business Models

The business model exists on a continuum.  Within that continuum, your business will fit into one of three categories: 

(Perpetual) Ownership

  • Utilizes large, upfront payments made years apart
  • You own it  
  • Example:  MRI/scanning technology machines 

Subscription

  • Relies on monthly and/or yearly renewals
  • Example:  Dollar Shave Club

Consumption

  • Only pay for what you use
  • No cure/no pay or “freemium model” services
  • Sales teams not necessary
  • Example:  Slack

How a business sells its goods, and how people are receiving and paying for those goods, affects the following RevOps metrics:

  • Sales cycle
  • Average contract value (ACV)
  • Win rates
  • Risk profile
  • Go-to-market (GTM) motions

Evolution of the Business Model

 

The Business Model

The Business Model Continuum

Think of the business model as an arc or rainbow shape.  Because it exists on a continuum, there will be small, almost imperceptible, differences within a given model and on the outermost ends of adjacent models.  However, the opposite ends of the business model itself (perpetual ownership and consumption) will represent polar opposite business plans and methods of customer retention. 

On the far left side is the (perpetual) ownership model and one the far right, the consumption model.  The subscription model is in the middle and serves not only as a model itself, but also as somewhat of a transition stage on its outermost edges.  

For example, when a business that exists as an ownership model begins to shift from selling a product/service every five years or so to every two years, it moves closer to the edge of the subscription business model.  Likewise, when a business that exists as a subscription model slowly transitions from selling their product yearly/quarterly to monthly, they begin to move to the edge of the consumption model.  

The (Perpetual) Ownership Model (1980s-1990s)

The ownership model was a product of the times it existed in.  In the early 1980’s, the Internet, social media, and business accounting software systems like NetSuite were still years away.  The concept of collecting payments in varied ways did not exist, and, as a result, there were essentially no other options or model types.  

The first business ownership model was on-premise hardware.  This entailed selling large pieces of hardware, with support contracts, to industries such as manufacturing and healthcare.  These were purchases that were being made once every five years or so (typically quite sizable pieces of equipment) and came in extremely large bursts.

The ownership model evolved slightly in the 1990’s with the arrival of perpetual software.  In this instance, you would buy a software license (e.g. Microsoft Office) and have access to some form of software for a given amount of time, usually a year or so.  This began a subtle shift toward the subscription model that took off with the rise of the Internet.

The Subscription Model (early 2000’s-2010)

SaaS Everywhere meme

In the early 2000’s, SaaS (software as a service) came to dominate the landscape.  As the Internet came to be, SaaS companies offered a new way to go to market by selling subscription services where you could pay annually, quarterly, or even choose to be on a monthly contract.  

The result was the subscriber business model.  This became extremely popular and was a far cry, to say the least, from spending tens of thousands of dollars four or five years apart, which is what was dictated by the on-premise hardware ownership model.  

The Consumption Model (2010-2020’s)

Subtle shift after subtle shift culminated in the birth of the consumption model right around 2010.  This model had not even been possible up until this point, but with the arrival of enterprise resource planning (ERP) systems, the ability to track usage (and payment accordingly) on a weekly, daily, hourly, or even on a by-the-minute basis made it a reality.  This model often employs product-led growth (PLG), which is currently very popular, as a GTM motion for sales.

Side note:  If you’re wanting to really put your wizard-level RevOps skills to the test, join a PLG company.  

The Return of Ownership? (2020’s-?)

mom jeans picture

Like the high-waisted jeans of the 1980’s, the ownership model began to make a comeback in the 2020’s.  Some businesses, particularly in the realms of government and healthcare, began to shift away from the subscription and consumption models and were moving back to attempting to secure multi-year contracts.   

This new shift brings the arc full circle back to the (perpetual) ownership model.  It is not yet clear how long this trend will continue or if it will branch out beyond the target market (mainly hospitals and healthcare) currently utilizing it.  What is clear is that changes in how a business bills and goes to market have, over the last forty years, dictated whether a business is classified as an ownership, a subscription, or a consumption business model and will continue to do so.

Know Who You Are

Nearly forty five years ago, English rock band The Who unknowingly, and indirectly, gave out some great business advice.  Knowing “who are you?” is crucial for long term success in reaching your target audience and creating sustainable revenue growth.

Bottom line:  you need to know what business model your company is.  Why?  Because where your business fits affects who you’re selling to, how you’re selling to them, and what GTM you should be doing based on what product you’re selling.

If you want to feel confident in the direction of your business, then contact RevPartners where we offer RevOps as a service (i.e. we want to be your RevOps team!).  We reduce friction and improve workflows by designing, building, and executing a revenue process to support a holistic go-to-market strategy.  

 

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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