Recurring, one-time, contingent, OH MY!

I was speaking with an entrepreneur the other day and asked what type of revenue they have. As we dug in, I explained that the type of revenue model a company has affects pricing, valuation, and how the business might scale. Here are examples of a few common revenue models.

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Recurring revenue

This is the model most common in software. A customer pays $X/month to use the product. This type of revenue can be more predictable, sticky, and if paid up front can be great for cash flow. Furthermore, this type of revenue generates the highest valuations.

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Re-occurring revenue

One-level below recurring is “re-occurring revenue.” This is when you have enough data to show that customers consistently spend a certain amount in a given year. For example, you know the average customer purchases 20 services per year at $1,000 each. Transactional revenue can also fall under this category (i.e. you pay $X per data call or $Y per financial transaction). While it provides some predictability, there is still the risk that an external factor drives usage way down (especially in a market downturn).

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One-time revenue

This revenue comes from implementations, or when you buy a specific product for a flat fee. These can be nice revenue boosts and help cash flow, but they are not recurring in nature. This type of revenue usually plays little into valuations and is risky because it has to be re-sold every year.

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Contingent revenue

Contingent revenue occurs when you partner with a customer to share in the savings/value of your product. For example, the company keeps 80% of the savings from the product and the vendor gets 20%. While this sounds great in theory, in practice this is very difficult to accomplish. My experience is this can often lead to fighting amongst vendors/customers, which is not good in the long run. Unfortunately, this arguing happens even if the product is delivering a ton of value and can ruin the relationship.

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There are other variants of revenue models, but it is important to understand which model(s) your business is using. When possible, I highly encourage trying to create a recurring revenue model for its predictability and value.

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