Recurring revenue businesses can have a range of different business models, operating on an arc between two extremes: the ‘pay upfront’ model on the far left side, to consumption-based business models on the far right side. Each model along this arc has distinct implications for the sales cycle, win rate, level of risk, and go to market model.
With the term ‘recurring revenue’, most people typically think of software sold on monthly, quarterly, or annual contracts, yet recurring revenue models actually exist across a much wider continuum. There are three types of models along this continuum:
Businesses can move from left to right, as well as from right to left, along this arc; doing so changes how the business should price their product, as well as how they sell it. It is crucial to be aware of these necessary changes, and the impact they have on the company's revenue operation.
Moving along the arc of this Business Model continuum from left to right results in the following key impacts:
Some growing trends of how businesses are shifting their business models are:
(i) Launching a SaaS product
A common trend among enterprises with a pay upfront model is to launch a new SaaS service that is aimed at capturing more market share and a more predictable stream. This often happens in the SMB segment, but may also happen in an enterprise business; one example is a hardware business that begins to sell a recurring support contract for the first time.
(ii) Selling to the Enterprise
In this scenario, an existing SaaS company that sells platform software to SMB and mid-market size companies will shift to selling multi-year contracts. This is typically due to the fact that their customer acquisition and retention costs are taking longer to recoup, and therefore a shift to longer-term customer commitments is necessary. This scenario typically occurs in large enterprises and educational institutions.
(iii) Accelerate with Usage / Impact
Instead of selling a platform to corporations, the model shifts to a monthly subscription/usage model sold to end users. This can increase the velocity of the sales cycle, but it may take 1-2 years to ramp up the ability to connect with a large volume of end users.
SaaS is not the only type of recurring revenue model;
virtually any business can be a recurring revenue business.
Each business model in recurring revenue has an effect on the sales cycle, the win rate, the go to market model.
Each business model in recurring revenue has an effect on the sales cycle, the win rate, the go to market model.
All of the examples depicted here are recurring revenue models, and a business can successfully employ more than one model at the same time.
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