Software business models – some numbers
I came across some interesting numbers in an appendix of a recent analyst report (JP Morgan – The Struggle Between Deteriorating Fundamentals and Historically Low Interest Rates, October 2012) that may be of interest for those consulting in the software sector. The interesting titbits:
- The overwhelming majority of software companies cater almost exclusively to enterprise customers (with the exception of a few like Microsoft, Adobe etc.). Sort of makes sense if you think about the MISO (Microsoft, IBM, SAP and Oracle) quartet.
- Maintenance renewal rates are ~85% for most software companies (true also for SaaS, except the license period may be shorter)
- Maintenance is very profitable for an enterprise software company, often providing 85% operating margins. Slightly lower for SaaS (at ~75%) “since subscription companies often have to run data centers to provide the service”. Still extremely high. Consultants should keep these in mind when making an efficiency/cost play; software companies can simply just hide their inefficiencies under this margin umbrella
- Maintenance accounts for about half of total revenue for the enterprise software industry today, versus about a third in 2001. Wow!
Worth a read.