Docs / Revenue Models
A Revenue Model is the type of revenue that a sales team generates. There are four types: One Time Revenue, Monthly Recurring Revenue (commonly referred to as MRR), Annual Recurring Revenue (commonly referred to as ARR), and Contractual Revenue. Different businesses will use different revenue models to understand the business, and some businesses will sell more than one revenue model simultaneously.
Aligning the sales team and pipeline with the correct revenue model is the key to forecasting and consistent team performance.
Revenue Model Types
One Time Revenue
In a One Time Revenue business, the deals won correspond to a single revenue event for the business.
A design agency that offers logo design services is a great example of a One Time Revenue business. They will charge a fixed fee for their services and the customer will pay a single payment for the logo design. The customer will not have any further obligation to the design agency, and once the payment is made, the revenue for the business is considered a one-time event.
Monthly Recurring Revenue (MRR)
In a Monthly Recurring Revenue business, the deals won correspond to recurring monthly revenue for the business.
For example, an enterprise inventory SaaS product can use a Monthly Recurring Revenue model. The product would charge a $50 monthly fee for each user who uses the product. If a customer has 10 users, the customer would pay $500 each month for the product, which would be $500 in MRR.
Annual Recurring Revenue (ARR)
In an Annual Recurring Revenue business, the deals won correspond to annually recurring revenue for the business.
For example, a facilities management company may utilize an Annual Recurring Revenue model to charge its customers a fee for security compliance. This fee would be charged on an annual basis, and would require customers to make a payment at the start of each calendar year to maintain compliance with the company's security policies. Typically ARR contracts automatically renew, so the company can count on a steady stream of revenue as long as the customer is satisfied with the service.
Contractual Revenue
In a Contractual Revenue business, the deals won correspond to a total contract value that will be earned over time. For example, a contractual deal value may be worth $100,000, of which 50% is paid immediately and 50% on completion. The timing of the payments is not impactful on the OSM model.
For example, a catering business could implement a contractual revenue model by charging customers at different milestones. For a wedding reception, the customer might pay 25% of the total contract price upfront, and the remaining 75% once the guests have left. This allows the business to spread out the revenue while providing the customer with a clear understanding of what they will be paying at each stage.
Impact on Pipelines
Each revenue model type a business has is analyzed separately when doing pipeline financial analysis. For example, it does not make logical sense to combine One Time Revenue and Annual Recurring Revenue into the Average Sale from the 4 Factors. Doing so would greatly overweight the one time deals and greatly underweight the value of annual deals.
When a company has multiple revenue models in one sales team, they are split into separate pipelines and analyzed individually.
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