Before you look at any valuation ratio, any margin, any growth rate, you need to answer one question: what is the engine underneath? A business model describes what a company sells, to whom, and how the money flows in. Two companies with the same revenue can have completely different economics, and almost all of that difference is explained by their business model.
The five models you will keep seeing
Subscription. Customers pay on a recurring basis for ongoing access — software, streaming, memberships. Revenue is predictable, customers are hard to push out of the business (the cancel button is psychologically heavier than most retail investors appreciate), and each renewal costs the company almost nothing. Adobe, Microsoft 365, Netflix, Salesforce, Spotify. Adobe moved from selling Creative Suite boxes at Media Markt for 800 euros to charging 20 euros per month in 2013, and its stock is up roughly tenfold since. The underlying product did not change that much. The revenue model did.
Transaction-based. Revenue per trade, per order, per booking. Marketplaces (Amazon, eBay, Mercado Libre), brokers (Interactive Brokers, Trade Republic on payment-for-order-flow), payment networks (Visa, Mastercard, PayPal). Volume matters. A good year for volume is a great year for revenue; a bad year for volume hurts immediately. Visa earns a tiny percentage of every card swipe globally, and because global card volume keeps growing, Visa's margins are among the best in any industry.
Product sales. The classical manufacturing or retail model — make or source a product, sell it, book the revenue once. Porsche, BMW, BASF, Bosch, H&M, Lidl's parent Schwarz Group. Margins depend heavily on cost control and pricing power. The same 20 percent revenue growth in a manufacturer can mean entirely different things depending on whether unit costs and selling prices moved together or apart.
Advertising-based. The users get a free service; advertisers pay for access to their attention. Alphabet (Google), Meta (Facebook, Instagram), most ad-supported media. Revenue depends on engagement and ad rates. A mild recession can crater ad spending — Meta's revenue fell in 2022 for exactly this reason — but the model scales beautifully when attention is high.
Freemium. A free tier attracts users, a paid premium tier converts them. Spotify, LinkedIn, Dropbox, many mobile games. The conversion rate is the critical number: Spotify converts roughly 40 percent of users to paying, which is exceptionally high. Most freemium services run at 2 to 5 percent and still work — because the free tier acts as marketing that would otherwise cost real money.
Why this matters for valuation
The market reliably pays more for recurring revenue than for transactional revenue. A software company with 100 percent subscription revenue, growing 20 percent a year with 80 percent gross margins, will command 10 to 20 times revenue. A manufacturing company with the same top-line growth will trade at 1 to 3 times revenue. The gap is the predictability premium: subscribers who signed up last year will almost all still be here next year, which means the revenue base is much less fragile than a company that needs to generate every euro anew each quarter.
This is why the phrase "20 percent revenue growth" means radically different things depending on the model. Growth in a subscription business is compounding durable cash. Growth in a manufacturer is last quarter's order book, which could evaporate in the next downturn.
Watch for the transition moments
The most valuable re-ratings in markets tend to come when a company transitions between models. Adobe going subscription. Microsoft migrating Office to the cloud. Apple shifting from hardware-only to services. The market recognises that future revenue is suddenly more predictable, and multiples re-rate accordingly. Watching for these transitions — and understanding why they matter — is one of the more productive applications of business-model analysis.
Once you see the engine, the financial statements start telling a story. The income statement is the output of the business model. Read the model first; the numbers will make sense afterwards.