Key takeaways

In this workshop, we cover the following: 

  • Outlining the recurring revenue business model, in context of how it relates to the 'pay upfront' model and the 'no cure, no pay' model
  • The range of payment models within recurring revenue, anywhere from paying upfront for perpetual software to paying as you go based on usage or impact
  • The differences between ownership, subscription, and consumption models

Key findings

Examination of these models in practical settings leads to the following key findings: 

  1. The business model has an effect on the sales cycle: Depending on your business model, the sales cycle can vary anywhere from more than 18 months in the 'pay upfront' model, to minutes or mere seconds in the usage model.
  2. The business model has an effect on the win rate: In the 'pay upfront' model, the win rate can be along the lines of one win for every three deals, whereas for usage-based models, the commitment required from the customer is far less, and therefore the win rate may be something like one in eight deals one.
  3. The business model has an effect on the risk level: As you move along the continuum of business models, the risk starts to shift from the buyer shouldering most of the risk, to the seller handling most of the risk.
  4. The business model has an effect on the Go To Marketing model: In the 'pay upfront' model, the focus is typically on winning deals, but as you move toward subscription and usage models, companies must shift their focus to delivering recurring impact for their customers, ensuring that those customers renew rather than churn.

Hi there. My name is Jacco van der Kooij, and I'm with Winning by Design. In this series, I love to share my passion for sales, and in particularly a scientific approach to sales. Now, today I'm gonna share with you several models, or in particular one model, but I'm gonna make it part of a series. Previously, I showed you the go-to-market model, and today I'm gonna share with you the business model. Now, let's take a look at the different models. So what you see here is the various models. Today, the business model, we have the data model. How do we map the data and how do we map processes to it? The mathematics behind it. As we discussed last week or two weeks ago, we spoke about the go-to-market model, which you can find on our YouTube channel right now. Next, we're gonna talk about the growth stages. How do you flow through the different growth stages? And in order to do that, we gotta go have growth methods. And essentially, we're gonna end up at benchmark. There will be a lot more models, but this is what we're going to start with right now. Now, at first, I wanna start with the business model and I wanna step you through the different business models. What you see down here is a horizontal axis, is the pay upfront compared to the no cure, no pay. Now, pay upfront, you may notice as well, think of that as hardware that you're going to buy. And a no cure, no pay, think of that as an ad that you're placing and that you only pay for when the ad is placed. In the middle, we got recurring revenue. Now, what I'm going to do, on the left side, you're gonna see a series of pay upfront services. On the right side, I'm gonna place a number of no cure, no pay. In the middle, we have the recurring revenue services. Now, first what I'm going to do is gonna give an example of how hardware versus software, how it all fits together. Explain it to me, because sometimes it's really troubling, like, hey, where does one end and where does the other start? Let's visualize it. So what you see down here, in the late 1980s and so on, I was selling lots of hardware and software services. In the beginning, those hardware were on-premise hardware. In the late 1990s, we're thinking about on-prem hardware, think of like routers being shipped to, for example, offices of a bank, 2,000 offices, routers needed to be shipped. Later on, the software in those routers became upgradeable, so we started to sell them with software support contracts. Eventually that earned into late 1990s, think of like the large scale ERP and CRM-based solutions. They were selling perpetual software. In this perpetual software, every client had a unique software branch. Very shortly, early 2000s, mid 2000s, we started to launch the SAS services, and originally they launched on a monthly contract. But you know what? Once we started to close monthly contracts, we got a little bit too much work on our hands, so we started to say like, "You know what? We need more money in order to hire more people." And so we went from quarterly to annual payments. Nowadays, it's very common for platforms to sell on an annual license, but in those early days, we were selling on a monthly basis. Now, what you'll see is how, essentially, the line merges from, if you look between multi-year and that what we see as the perpetual model, how the line merges day after day, time after time, as we are progressing. So what I'm going to take is I'm gonna take your slightly but surely through multi-years, two years, three years, four years. And before you know it, you end up at perpetual software. This is how that gray area between SAS suddenly turns to perpetual once we start creating multi-year, paid upfront kind of contracts. On the other side, we're gonna take a look at monthly. Now, look as I go for monthly and I go, think of monthly going to weekly to daily to hourly. Eventually I'm gonna end up at usage. Usage means how much am I consuming? How much bandwidth am I consuming? How much storage space am I consuming? Usage. Seats, for example, is a form of usage. But really, once you start putting it a monthly contract, you see more and more monthly or annual contracts, up to 10 seats. It's a form of usage, but it goes and it's bundled inside the platform. Further, beyond usage, we're gonna have impact-based. Now, impact-based means I have to essentially deliver what I promised. I gotta make sure that it addresses what did I deliver. So, for example, rather than just paying for an installation of an application on an iPhone, I may pay for the moment in time that the people enter the credit cards and on a gaming app or on a betting app, sports betting app, download or upload a deposit, the first 100, 200, $300 inside the app. That is an impact-based. Downloading the app is usage space, but the moment in time that they start depositing money, I get, as the betting company, what I want. I start to pay for impact. Now, if I go further to the right, and I know it's minute over there, you see the freemium model. And then this gives us the final picture. In the black, you see ownership-based services, business models. In the blue, we're gonna see subscription-based business models, and in the pink, we're gonna see consumption-based business models. And that leads us to believe to go into the first series of findings. I'm gonna share with you some findings that we've learned on these models. If I now gonna see what the effect learnings are. First, I'm gonna take a look on the sales cycle. How did this impact the sale cycle? Because it has had an impact. So what we started to see is that hardware, that often was purchased in very long cycles, nine to 18 months. And I want you to think of those nine to 18 months as this engine, it's running steady, and very steady as she goes, but it's like it takes often nine to 18 months to win these large deals, and they keep going. As a result, because I'm driving for such a long time, it consumes a lot of money over time, but it is often rewarded with high gains. I get a lot of, the big deals are starting to pay for it. The startup costs often are two to three years before I start winning that big deals. Now, compare that against SAS sales. It's like revving an engine, like a lot of deals are gonna come in. And as these deals keep coming in, and keep coming in, and keep coming in. The shorter the sales cycle, 10 days to six months is really occurring. And, you know, like the sales cycle ends up at the topper end at six months, you know, like it starts to encroach on that nine to 18 months. And you can see, if you start thinking about annual deals, multi-year deals, you're probably gonna get closer to the six months. And if you are lower cost, $5,000-deals, you're probably gonna be probably measured in days. So for example, a $10,000-deals has about a 20, 22 day sales cycle. And a $15,000-deal has about a 30 to 32, 33 day sales cycle. Now, when we really start to speed up, and I mean like really, is when we go to usage and consumption models, deals suddenly occur at a way higher speed, but it happens to burn a lot of our resources too. And as you can hear in this particular engine. You see? That's how, you know, like these engines consume a lot more money and that's often why these models need to be well-invested with VCs. These models often bring in a lower dollar value, $30 per month per user, in comparison to like the models down here that can be like 200, $300 per month per user, or 24K, 30K, 50K, 100K per annum for an annual contract. So down here, I need a lot more clients and that's why they burn so much higher. Now, if I take a look what the impact of the win rate is, we're gonna see something very similar. On the win rate, we're gonna see that at the beginning, it is essentially like on-premise hardware. The win rate is one in three. You may recognize this as the three X pipeline you often hear about in the sales world. You need to have three X as much as you close. And we even hear that in SAS sales and in other forms of sales, other forms of business model, where it totally doesn't matter. The three X here comes from a buyer having to have budget before they go to a vendor. Early on, when you were buying like multimillion dollars of routers, buyers were required by organizations, by their corporation, to have a budget in place before they go start doing proof of concept and so on. And therefore the win rate is one in three. What we see when we started a win rate in the recurring business, you know, like there's a lot more tire kickers out there. There's a lot more people who are checking things out. You don't need the budget to offer the service, and therefore the win rate, it has dropped to one in eight. And this is in stark contrast of what you are used to seeing. Now, if we wanna go to light speed.

- [Announcer] Activating light speed.

- Then you can see, of course we're gonna go to one in eight, we are going really fast now. We see that the win rate as we go go faster is dropping. This is really different. The required commitment is less and therefore fewer qualified, well-qualified buyers end up. Now, if you think of yourself, one to three, to one to five, the one to eight, you're going to see that automatically, when we go further, we end in a problem issue.

- [Announcer] Warning.

- And that is when we enter the freemium.

- [Announcer] Warning.

- Now, the reason why there's a warning of freemium, because freemium has the lowest conversion rate that is needed to get to a paying customer. It takes quite some effort to turn a freemium customer into a paying customer, hence one to three, one to five, one to eight. A freemium customer can go one in 100 or less. It is that hard to convert. That is for us to talk about the win rate. Let's take a look at the risk. Now, what I'm going to depict down here on the right is the risk picture, okay? In the risk picture, we're gonna see the buyer and the seller. Now, what I'm going to depict is how, as we start buying here, how high the risk for the buyer is. You see that? High red. The buyer takes a huge risk. The seller takes less of a risk. This is reflective, for example, when I was selling in the enterprise world, early in, you know, late 1990s, early 2000s, man, Oh, man, did they love you seeling stuff. The moment in time you closed a million dollar deal, It was not your problem with sales anymore. There was no risk, but if the buyer bought the wrong solution, they could get fired for that. Today, that's very different. So the buyer in that case took a lot of risk, the seller took no risk. Look what happens to that risk The moment in time at the contract, you're going to see the buyer took a little bit less of the risk. The moment they started getting upgrades in software, the software took a little bit less of a risk. Today, we see that that risk has flipped. The risk of annual contract is heavier weighted towards the seller, because the seller has to build the infrastructure, buy the Amazon equipment and other cloud services, bandwidth, CPU, they have to develop the code. And so well before there's any paying client, the seller has to do this. That puts a lot of risk on the seller's side. And in return, you see, you know, the buyer can go one year, let's see what turns out. The risk is even lower if we start to get into usage. See how low it is right now, it's very low. Look at how it drops. It makes it even lower. And essentially, if we go to impact, it is yet even lower than before. What is, the buyer's hardly taking any risk. I mean, you know, like you're paying them to give you pretty much money, right? In the case of the betting app, hey, I'm paying $10 for an install when the client deposits $200 in my account. Yes, that is the risk. Very too little risk for the buyer and lots of risk for the seller, who has to acquire all the intelligence needed. If you look at that, there's a comparison down here I want you to take a look at what the risk is between monthly and annual. Now, I want you to take a look, is that monthly and annual, your risk as a seller is the same, because you pretty much, you know, like you have to have bought the entire system and the entire infrastructure needed for that. As the risk variates, that's the risk of the buyer varying by either paying monthly littler risk to a lot more risk to buying an annual contract. And that is the risk model explained. I want you to know that the industry has not yet adjusted to this shift in risk. They are still operating as if the risk is the same in the past in many cases, and that includes the buyer and the seller. The buyer is less aware that the risk has shifted and it acts and operates when they are buying a SAS service as nothing has changed. It does proof of concept of multiple vendors. It just tells you to drop the price, all these things. You need to understand that it is unfair that the way they're looking and asking for discounts the same way they used to get discount in the perpetual hardware, the perpetual software world. This is different, this is the reason why we say there is no discounting in SAS, or in subscription services or in consumption models. There is none. The risk has already been completely absorbed by the seller here. Keep that in mind. The fourth one, former last, I'm gonna talk to the effect on the go-to market model. Now, what you're going to see down here is that this go-to market model originally is built and aimed towards just a maniacal focus on winning deals. Most of the go-to market model are focused all on winning account. Salespeople get paid high dollar values, because the prices of being sold are million dollar contracts. And so you're gonna pay a salesperson often 250, 350, $450,000 a year to strike these multimillion dollar contracts, because the deals are so big, although they often get consumed over three, five, six, seven years. And that is what happens here. Now, if I go higher and I'm going to a different speed.

- [Announcer] Incoming message.

- Oh, incoming message. What is important down here is the moment in time that I go to subscription-based model is that I need to increase my focus on actually delivering the impact. No longer am I just a winning, a maniacal focus on winning, I need to make sure that my customer success, and my company, and my product, and whatnot delivers the product, okay? This is super important, delivers the impact that it was promised. And I tell you as follows, no recurring impact, no recurring revenue. No recurring impact, no recurring revenue. Let me give that up officially, right?

- [Announcer] Incoming message.

- No recurring impact, no recurring revenue. Now, as I speed things up,

- [Announcer] Activating light speed.

- What we're going to see, the consumption model. Yeah, I know. Folks, I'm making these video. Yo, when you see these sound samples, that's the fun of it for me, okay? This is the key why I'm having so much fun. I'm sorry. You must think like this dude is absolutely nuts, playing music and so on, like, yeah, this is time for another song. Boom. Okay. And so now what I'm seeing is I'm going to the consumption model. The focus in the consumption model has now shifted, where if I go the ownership model, a maniacal focus on winning deals. When I'm seeing a subscription model, a balanced model on winning deals and achieving the impact. But down here, often we use product-led growth or something like that of sorts in order to acquire the client. But then, we need to make sure we deliver, because if we're not, we're going to see them churn. They're gonna be gone. And therefore, there should be a maniacal focus on making sure we deliver that we promised the client, and even that we pick our clientele on the basis of if we can deliver that. Now, final step here is the different transitions, the most common transitions that we see. What you see here, I'm gonna depict to you three common transitions. Number one, a common transition is when a company currently has a perpetual model and launches a subscription model, moves to an annual subscription. They've noticed that their product is currently competing in the market with a SAS service, that they're losing deals to it, and therefore they wanna go to a subscription model. What we also see is companies who are on a subscription model are moving to a multi-year subscription model, which starts to awfully come close to a perpetual model. And sometimes we see three-year perpetual, sorry, three-year, multi-year agreements with paid upfront for three years. Folks, that's awfully perpetual at that point in time. Obviously the software gets updated. I get that it's different than shipping somebody a disc and not having to worry about it, but still, the business model feels very much like a perpetual model. And that is fine. This works often for clients in which, for example, security software, they're not gonna and redo everything after a year. They're gonna stick with the vendor of choice at that point in time. These are more like deeper partnerships that are often built. And finally, the third model, with products that have consumables, such as, you know, like gaming or such as gambling, online betting, they are consumables, and that consumable growth is much bigger than the seat growth and how many apps you have installed. That, you see that they move to usage or even impact. Those are three different models that you see that we can run. And those models really, really provide us with an insight. Now, if I take that and put it in perspective, this, what you see down here, is the Winning by Design business model. It allows us to explain the difference, the trends, where you're going, where you're going to, where you're coming from, and it helps us to understand that all these business model, ownership, subscription, consumption, they all work with each other. And with that, I hope to have given you a great idea about all the different business models that we have. I hope that you're gonna enjoy, in the future, one of our episodes, and like I said before, this was the business model. I'm looking forward to share with you many of the new models that we have in store for you. And with that, I wanna wish you and looking forward to, you know, like another day, another episode, new models coming out in the near future. Yes, model, about every two weeks I'm trying to share with you a model, and I'm trying to do that in order for you to have some sense, okay? Grow the revenue, learn more about sales, why not? It's not all about closing. It's not all about finding leads. There's a lot more to it than just that. And with that, I'm gonna let you, see your next time, okay? Have a wonderful time. Hope this have helped you learning more about the science behind sales.

Learn how to Architect Your Revenue using the Recurring Revenue Operating Model

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In this workshop, we cover the following: 

  • Outlining the recurring revenue business model, in context of how it relates to the 'pay upfront' model and the 'no cure, no pay' model
  • The range of payment models within recurring revenue, anywhere from paying upfront for perpetual software to paying as you go based on usage or impact
  • The differences between ownership, subscription, and consumption models

Key findings

Examination of these models in practical settings leads to the following key findings: 

  1. The business model has an effect on the sales cycle: Depending on your business model, the sales cycle can vary anywhere from more than 18 months in the 'pay upfront' model, to minutes or mere seconds in the usage model.
  2. The business model has an effect on the win rate: In the 'pay upfront' model, the win rate can be along the lines of one win for every three deals, whereas for usage-based models, the commitment required from the customer is far less, and therefore the win rate may be something like one in eight deals one.
  3. The business model has an effect on the risk level: As you move along the continuum of business models, the risk starts to shift from the buyer shouldering most of the risk, to the seller handling most of the risk.
  4. The business model has an effect on the Go To Marketing model: In the 'pay upfront' model, the focus is typically on winning deals, but as you move toward subscription and usage models, companies must shift their focus to delivering recurring impact for their customers, ensuring that those customers renew rather than churn.

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your revenue?

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