by Bill Vinck, Excendio Advisors

When is a dollar worth more than a dollar?


The premise of this article is that while all businesses like revenue not all forms of revenue are equally valuable. Revenue types differ in important respects and there is a hierarchy among types. A “subscription” dollar can be seen as more valuable than a “product” dollar. The topic of revenue types and their relative values comes up frequently in M&A conversations.

We will consider the topic from several related perspectives beginning with the revenue types typically found in IT businesses. We’ll continue with a discussion of other revenue characteristics and some associated metrics including margin and scalability.

These ideas are arrayed in a matrix which summarizes them in a fashion potentially useful to a management team for planning purposes as well as facilitating business analysis discussions in an M&A situation.


Revenue Types:

Subscription: Revenue is generated when a client executes a contract of a year or longer to receive access to the firm’s technology. SaaS is an example.

Subscription Add-Ons: Some firms provide add-on products for a fee to subscription product clients.

Service Annuity: Revenue is generated when a client executes a contract for a year or longer for a specific service. Maintenance contracts are an example.

Project: Revenue is generated when a client executes a contract for a specific service described in the project scope of work and the service is completed. This type has no ARR but may have historical repeat revenue from certain clients.

Product: Revenue is generated when a 3rd party product is sold, and the client takes title.


 Revenue Metrics:

ARR: Annual recurring revenue amounts. Specified in the contracts.

Margin: Current margin percentage.

Scalability: Ease with which new clients can be added without significant incremental expense.

Rate of Growth: Percentage annual increase for this type of revenue.

Contract Duration: Average duration of contract.

Churn: Percentage of clients who leave or downgrade this service.

Growth Initiatives: Roster of projects conducted internally with the specific intention of improving the revenue characteristic under consideration.

Expected Impact: Expected result of each initiative.



 Management Matrix

Revenue Type/Metrics Subscription/+ Service Annuity Project Product
ARR $ $ $ History $ History
Margin % % % %
Scalability Degre of difficulty & Cost Degree of difficulty & Cost NA NA
Rate of Growth % % % %
Contract Duration Average # years Average # years NA NA
Churn % % NA NA
Growth Initiatives Description & Target Description & Target Description & Target NA
Expected Impact % change % change Volume and margin impact NA
% Total % % % %



By developing and maintaining a matrix like this, a management team has a simple tool at their disposal to see current discrete revenue trends. It displays a key view of the current revenue picture. Further it can plan and track revenue characteristic enhancement projects.

For a firm anticipating transition, the matrix is a simple tool to begin business analysis and valuation.