What If We Started Thinking About Durable Revenue and Revenue Quality?

We’ve been trained to worship the recurring revenue model. It’s the star metric in every SaaS pitch deck, with ARR growth as the bedrock of business models. It dominates our feeds, the press and much of our thinking in business. Unicorns have been built on this recurring revenue model. But lately, that model has been shaky.

And, I have to confess, I’ve always been a little confused. What about the revenue and growth models of all the other businesses outside SaaS? How could they have possibly been successful without the recurring revenue models? What is different about them? Afterall, SaaS represents about 3-5% of the global GDP and 2% of sales jobs (Thank you Aaron Evans), while all these other businesses represent the remainder.

Let’s dive briefly into the revenue models of these other industries, markets.

There are those with Re-occuring models. Think capital equipment and similar types of products. The majority of revenue is based on the upfront purchase of a product. Subsequent revenue is generated through maintenance, service, parts, upgrades. A key strategy in these types of industries is the “new and improved model.” Our IPhones are a perfect example of this, it’s a re-occuring model. It’s a strong product, that keeps getting better, attracting us to buy the new models. Laying groundwork on the durable revenue model, a key to this is continuing to build customer loyalty, satisfaction, and experience in their use of the products.

There are Transactional models. Models built on a one time purchase/offering. Perhaps the best example is consulting, professional services, systems integration. These are all project oriented revenue streams. Revenue ends when the delivery on the project ends. But as any of these organizations knows, we want to create customers for life, we want to be the preferred choice for the next project. Again, laying the groundwork for durable revenue, we see these organizations incorporating platforms and ongoing services to create continued revenue streams.

There is a category of Durable revenues that have existed ever since people started building products. This is what I call the embedded product companies. These are the companies that sell the basic materials, components, parts that go into the products we buy (these can be physical products or software products). The reason these are durable revenue streams is once the customer’s product is designed, it’s difficult to displace it. Think, for a moment, it’s very difficult to replace the NVidia chip that’s in then next AI data center we build. And the success and growth of these revenue models is based on the success and growth of the products using these components. This goes on for years and decades. As locked in as these revenues seem, customer satisfaction is critical in these business models, as well. For example, many materials, parts, components, can be multi sourced. For example, I might design my computers to have several sources of semiconductors (while old, think Intel and AMD). The other thing is customers are always building new products. If they are dissatisfied with our current products, they won’t consider us for future products.

I’ll stop here, I’ve nerded out on different revenue generation models. As we look across all sorts of industries/markets, for example capital equipment, construction, financial services, healthcare, retail, consumer products, entertainment/gaming, real estate, technology, and others, we find their revenue models built on some or all of these four basic models. I won’t bore you with the detail, but let me provide a summary of these four models in this chart:

Let me shift the conversation from revenue type to revenue quality. Whatever business we are in, whatever revenue type or model we have, our focus has to be on maximizing revenue quality. Revenue quality focuses on building defensible, scalable, resilient, and earned revenue over time. It’s created because it is structurally embedded into our customers’ operations, products, success. It doesn’t disappear because a better offer comes up or because of the appearance of a bright shiny object.

High quality revenue doesn’t repeat, rather it persists because the customer wants it to. In generating this high quality revenue, we move from how often we get paid to, how deeply the customer would miss us if we were gone.

Focusing on durable revenue shifts the attention from how revenue comes in to why it stays, why we keep building on what we’ve created. We focus on customer experience, satisfaction, and entanglement—that we are inseparable from what our customer does. Whether we are embedded in their products, in their manufacturing lines, in their operations, and how they do their work. We look at design-ins, integrations, strategic dependencies, and building trust on an ongoing basis.

In our own operations (not just our GTM strategies) we must daily ask, “What are we doing to make it worth our customers staying with us? What are we doing to make leaving us unimaginable?”

The type of revenue we generate is meaningless. The quality and durability of the revenue we generate is what builds and sustains us.

Afterword:  Here is the AI generated discussion of the article.  I really liked this discussion.  In the article I grapple with complex ideas, this discussion simplifies it with great examples.  Enjoy!