For optimal value creation of a company, the choice of earning model is crucial. It determines not only how a business makes money, but also how attractive it is to investors or buyers.
The revenue model is the financial heart of the business model: the business model describes how value is created and delivered, while the revenue model shows how that value is converted into revenue.
Transaction model: direct results, less predictability
The traditional transaction model revolves around the direct sale of products or services. The customer pays for what he receives, with no further obligation. This model is manageable and easily scalable, but also has peaks and troughs. Revenue often depends on order inflow, seasons or business cycles.
The value of a company with a pure transaction model therefore depends heavily on margins, market position and customer relationships. The predictability of future cash flows is limited, and that usually translates into a lower valuation multiple.
Subscription model: more stable cash flow, higher valuation
In the subscription model, the customer pays periodically for access or use, not for ownership. Think of SaaS solutions, maintenance contracts or subscription services such as streaming. Revenue is repetitive (recurring), which provides more stable cash flows and higher predictability. This lowers the company's risk profile and thus raises its valuation.
On the other hand, the initial investment is often higher. The company must initially bear the development costs, while revenues gradually build up. So it requires sufficient financing room and a focus on customer retention to cash in on the full value of subscriptions.
Trends and practice
The shift from ownership to use is widely visible. Where consumers used to buy, they are now more often choosing subscriptions to everything from software to washing machines (CoolBlue) or sports watches (Whoop). We also see this transition in B2B markets: businesses prefer to pay for performance rather than ownership.
At IRIS CF, we find that buyers become enthusiastic about businesses with a recurring revenue component. In acquisitions, a well-founded subscription model almost always leads to higher valuations. Even the demonstrable potential to switch from transactions to subscriptions can increase value, provided there is a realistic plan for implementation and financing.
Conclusion
The revenue model largely determines how investors and buyers view your company. Recurring revenue offers predictability and stability and higher valuation multiples, but requires investment and discipline. Thinking about the right model, or the right mix, in good time lays the foundation for sustainable growth and a more attractive exit.
