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What is the average or target mix of revenue for a software company?

software company revenue modelI am looking to find the average or target mix of software license revenue, professional services (tranining/consulting), and annual maintenance and support for a software company on an annual basis.

Answers

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

John,

The last time I focused on this in a company where it was relevant (custom enterprise s/w), we were aiming to stay below 15% on the Prof Services. Maintenance was more sketchy as we liked the recurring revenue from subscriptions, and this meant that maintenance was uncommon (increasingly the case now that SaaS is really gaining speed). We tried to keep maintenance at 18-20% of perpetual license cost, with the subscription cost being about double that (and technically including maintenance).

That being said....
...it really depends on the nature of your product.

Keith

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

Sounds like your company is subscription based. Does annual maintenance cover major upgrades? Are you trying to benchmark revenue or billings? (I.e., does your sales force use training and consulting as loss leaders to close business?) How much is the subscription value on an average new account? What's your daily charge-out rate for consulting and training and how many days does the average account require to get them up to speed?

Those all play into the metrics you're trying to establish. At a former company where we had initially thought we'd be able to do 10-20% on PS, we ultimately were recognizing revenue at 3-4%. As the product became more mature, the split between subscriptions and annual maintenance started approaching 1:1.

There are some good sources of industry benchmarks over time that you may want to check out. Google "revenue benchmarks software company." If your company is a member of SIIA, you can download a copy of OPEXEngine's 2012 report on the software industry. Or, you can go to them directly and purchase a report. There may be some other sources out there as well.

Bob Low
Title: Principal
Company: Perron & Low
(Principal, Perron & Low) |

I'm assuming your model is an upfront license with annual maintenance. At a former company with this model and a mature customer base our annual revenues broke down roughly 20% license, 35% pro services, and 45% maintenance. For new sales, maintenance was 18-20% of license revenue and implementation services roughly equaled license revenue. With this pricing model, a young company will have license revenue as a higher proportion than I described but as it matures, the maintenance base increases and there should be additional services to the base. At some point, maintenance starts to level out as attrition offsets new sales.

Topic Expert
Henry Schumann
Title: Manager FP&A
Company: Allscripts
(Manager FP&A, Allscripts) |

Sageworks or Robert Morris Associates track industry metrics. I'm sure they could provide you with data on Software company revenue mix (likely for a fee though).

Barbara Kandemir
Title: VP Finance & Administration
Company: KnowledgeAdvisors, Inc.
(VP Finance & Administration, KnowledgeAdvisors, Inc.) |

When we talk about revenue generated by the Professional Services/Consulting teams, it is important to strip out integration/implementation (which have a different revenue recognition model than project based services). Consulting can actually play an important role in demonstrating the value of the software and making the subscription "stickier" to the client.

Michelle Rogers
Title: Principle
Company: MR Consulting
(Principle, MR Consulting) |

I work with 5 software companies (3 play in the municipal market space, 1 in GIS and 1 in Works Management). The ratios of software, services & maintenance revenue streams vary from operating company to operating company. However, all strive to increase their annual maintenance to cover support, development and administrative costs. If they can do that, then they are well positioned to be cash positive (primary objective as cash is the lifeblood of an organization).

We also look at metrics such as revenue per sales rep and revenue per consultant. The ratios expected for sales reps are higher due to that position being more efficient in generating revenue. More specifically, they impact their average deal size vs. a consultant who is limited by the number of hours they can bill.

For revenue per consultant, we set utilization targets based on a 70% utilization rate which accounts for 'downtime' such as vacation, stat holidays, professional development. In general terms, we expect a revenue generating employee to achieve between 2 - 3 times their fully loaded salary.

In establishing targets for the organization, the software to services ratio depends on if the organization simply provides services linked directly to software sales (project driven) or if they have expanded their services offering to include training, business process optimization and re-implementations (clients who have had their system for a length of time and should re-implement to get the most out of their system). The latter is the preferred model as it reduces the reliance on software sales which can be linked to other factors the company cannot control.

Topic Expert
J.D. Floyd
Title: Owner, CFO
Company: CFO Outsourcing Solutions, Inc.
(Owner, CFO, CFO Outsourcing Solutions, Inc.) |

A very open-ended question - kind of similar to "what is the best flavor of ice cream?".

That being said, my read of your question implies to me your company is not SaaS, but "regular" SOP 97-2 software. With a mature product, where you already have established VSOE for Maintenance, typically 15 - 20% of license fee, my experience is that the "normal mix" of revenue is 20% Maintenance, 5 - 10% Professional Services and the balance License Fees.

Now, if you are talking SOP 81-1, then all bets are off in the above split.

J.D. Floyd

Ken Goldman
Title: CFO and VP Finance and Administration
Company: Yahoo
(CFO and VP Finance and Administration, Yahoo) |

Sort of depends maturity of the company, the earlier stage the higher % of license revenue compared to professional services and maintenance. steady state may be more like 50% to 60% license and balance maintenance and professional services. The other question which you did not propose is that for SAAS companies all pretty much the same except for much smaller % of professional services, but maintenance tied in to the recurring software license revenues.

Konrad Sosnow
Title: Revenue Recognition Guru
Company: Konrad M. Sosnow & Associates
(Revenue Recognition Guru, Konrad M. Sosnow & Associates) |

There are a few additional questions that you should ask. Are your license revenues increasing, flat or decreasing? Remember, licenses are your most profitable product. Are customers renewing their maintenance? Are you constantly upgrading your products to beat competition? If so, you are building a strong installed base. It is always easier to keep an existing customer rather than replacing them with a new customer. Is your professional services profitable? If you are doing things correctly maintenance will grow as a % of total revenues over time as the existing customers renew.

Harold D. Tamayo
Title: Vice President of Finance
Company: MHA Inc., a Roper Technologies Company
LinkedIn Profile
(Vice President of Finance, MHA Inc., a Roper Technologies Company) |

The answer is it depends. What is the life cycle of the products and offerings and what is the business model? Where are you putting sales and marketing resources to promote the business lines? What is your customer mix which can tell you what is that they are buying? If you can get industry benchmarks but specific to your business segment, then that can be helpful. In my view, you need to benchmark appropriately so that you are not measuring the revenue mix against businesses that are different from yours.

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