Revenue hierarchy
Factual definition
A ranking of revenue by how hard it is for the customer to leave, from a binding contract at the top down to a transaction that cannot happen twice.
Revenue hierarchy in round numbers
Hanil’s service line is 12.0m of 100.0m in revenue, and 7.2m of it is under signed contract. That backlog sits at rung 1, and the same work sold order by order sits at rung 7.
A stream can carry more than one hold, so place it at the strongest. Classify a stream rather than a company, because an equipment business sells installation, monitoring, parts and repairs on four different rungs.
The ladder ranks the hold and nothing else. Usage-based and per-transaction pricing sit at any rung, because how much a customer spends is a separate question from whether they come back.
A need can recur without the customer recurring. Annual maintenance bought from whoever quotes lowest is a repeating need sitting on rung 7.
| Rung | What holds the customer | Where you see it |
|---|---|---|
| 1Hard contract | A term the customer is bound to, covering work that continues through it, with a penalty for leaving early | Enterprise software, mobile plans |
| 2Automatic renewal | The arrangement continues automatically until the customer stops it | Cloud storage, streaming |
| 3Sunk-money subscription | A recurring fee supported by an investment the customer already made in equipment, data or training | Alarm monitoring, payroll systems |
| 4Renewable subscription | A fixed period, paid up front, that needs an active decision to renew | Magazines, annual memberships |
| 5Sunk-money consumable | A repeat purchase favored by compatibility with something already bought | Razor blades, printer ink, coffee pods |
| 6Consumable | A repeat purchase with no contract and no compatibility requirement | Toothpaste, shampoo |
| 7Repeat engagement | Separate work, orders or replacements that have to be won again each time | A second campaign from the same agency |
| 8One-time | An isolated purchase with no realistic second one from that customer | A wedding dress, a single house sale |
Rungs 1 to 6 are John Warrillow’s hierarchy of recurring revenue, from Built to Sell. Rungs 7 and 8 extend the ladder below his floor.
Shayne Fitz-Coy’s definition of Revenue hierarchy
Recurring revenue is a read on how hard a business is to run. A company that has it does not have to earn its sales again every month.
That is why it is one of the core tests for a compounder.
How Shayne Fitz-Coy uses Revenue hierarchy
It is one of the top criteria on every deal we look at. Some form of repetition in the revenue has to be there.
From there you walk down the ladder. One-off bid work sits at the bottom and is the worst kind to buy.
Why Shayne Fitz-Coy’s perspective on Revenue hierarchy matters
John Warrillow built this ladder. His six forms of recurring revenue took a word that sellers use loosely and put a scale under it, which is why it is still the taxonomy people reach for.
He wrote it for the owner. The rungs are a guide to climbing, and for anyone building a business toward a sale that is the right advice.
Shayne Fitz-Coy teaches the same ladder from the buyer’s side of the table. A private equity firm is buying revenue quality, so the work is finding the businesses that already sit high on it.
Converting a stream to a higher rung is the owner’s project and it takes years. A buyer prices what is there on the day, which is why the two rungs below Warrillow’s floor matter.
A run of won bids reads as repeat business in a teaser, and it has to be re-won every year.
Terms Related to Revenue hierarchy
Recurring revenue · Backlog · Churn · Switching costs · Net revenue retention · All of the glossary