Key Takeaways

Recap

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 not written with RevOps in mind. However, the question posed is essential for all businesses to answer and understand. Knowing who you are, or more precisely, what your business model is and how it affects key differentiators and key RevOps metrics, is essential to doing RevOps well. Your business model is the foundation upon which your revenue engine framework is built. Know it. Leverage it.

Business Model-3 Categories

For B2B (not applicable to B2C), 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
- Payments made years apart
Subscription
- Relies on monthly and/or yearly renewals
Consumption
- Only pay for what you use
- No cure/no pay or “freemium” services

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
GTM motions

Evolution of 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, but the opposite ends of the business model itself (perpetual ownership and consumption) will represent polar extremes.

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, both the Internet and business accounting software systems like NetSuite were still years away. Because of this, there were essentially no other options or model types.

The first ownership model was on-premise hardware. This entailed selling large pieces of hardware to industries such as manufacturing and healthcare. These were purchases that were being made once every five years or so (think MRI machines in the healthcare industry) 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)

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

Hence, the subscription model. A far cry, to say the least, from spending tens of thousands of dollars four or five years apart as what was dictated by the on-premise hardware ownership model. Not surprisingly, this became extremely popular.

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 by-the-minute basis made it a reality. This model often employs product-led growth (PLG) as a GTM motion for sales.

The Return of Ownership? (2020’s-?)

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 current industries (mainly 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.

Effect of the Business Model on Metrics

As teased above, each unique business model (i.e. how a business sells its goods, how people receive those goods, and how people pay for those goods) has an effect on metrics. Because the business model exists on a continuum, the greatest differences in these metrics will be seen on the opposite ends of the arc, which are represented by the (perpetual) ownership and consumption models. The contrasts will not be as pronounced within a given model or in adjacent models.

Effects of Various Business Models on: Sales Cycle & ACV

Ownership Model (Sales Cycle & ACV)

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.

Subscription Model (Sales Cycle & ACV)

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 (Sales Cycle & ACV)

Because the consumption model has a sales cycle that can literally be in the seconds range (coupled with a virtually non-existent ACV), a sales team is not even necessary. This model employs product-led growth (PLG) where your product quite literally is the sales team.

In summation, your business model dictates what set of instructions you’re going to give to your sales team, your CS team, and your marketing team and what GTM motion you’re going to choose.

Effects of Various Business Models on: Win Rates

When DJ Khaled said, “All I do is win, win, win, no matter what”, he certainly wasn’t referencing business model win rates. Certainly not all deals are closed and won and 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 (Win Rates)

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.

Subscription Model (Win Rates)

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 (Win Rates)

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.

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.

Ownership Model (Risk)

In the (perpetual) 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. 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 (Risk)

The subscription model changes this dynamic. In this model, the buyer can walk away and get out of a contract, there are small termination fees, and there are frequently 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 (Risk)

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 and 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.

Each of the business models requires focus in different areas. For example, the need to secure recurring revenue will require a huge amount of time and effort to be expended in that area as opposed to a model where there is no need for it.

Ownership Model (Focus)

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 as the products being sold won't need to be renewed for another five to ten years. Meaning: all sales, no CS.

Subscription Model (Focus)

For the subscription model, it’s a different story. In these businesses, you don't make money on selling contracts, but rather on the ability to secure recurring revenue. 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 CS.

Consumption Model (Focus)

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. This model essentially relies on two things: driving an immense amount of deals and having a good product. CS drives all of the revenue here.

Common Trends of the Business Model

3 Common Business model Trends

What do we see happening in the business models over time? There are three common trends which have emerged:

(Perpetual) ownership models attempting to become subscription models
- Why? Because there are lots of competitors
Subscription models attempting to become (perpetual) ownership models
- Why? Because they need guaranteed cash
Consumption models attempting to become subscription models
- Why? Because PLG is difficult to do; they want less friction

All of these changes involve a new GTM motion, a new team structure, and a new product. You’re essentially starting a new business.

Who Are You?

It is vital for each business to recognize which model they are operating under as each presents its own advantages and disadvantages. A firm understanding of where your business sits on the business model arc allows you to better allocate your company’s resources when considering the sales cycle, ACV, win rates, risk, and focus. A business also needs to be aware of how seamless or potentially difficult a movement toward a different model may be.

Modules

Class 2: The Business Model