Profitability can be defined as the difference between a company’s turnover and the amount of money invested to achieve this result. But that is theory… In the real world, there are a thousand ways to assess it! Turnover, R&D investment, integrations or even your business model… Here are ways to help find out more about profitability as a software publisher!
Focusing on the recurring aspect in your turnover
Generally speaking, the older a company is, the easier it becomes for it to rely on a specific recurring turnover coming from SaaS subscriptions and maintenance services. Hence, depending on the amount of that recurring turnover it will be possible to estimate the age of a software publisher and thus, its profitability and ability to generate profit.
Upon its launch, a publisher will sell numerous subscriptions at a rather low cost. After 9 years of activity, Akuiteo itself has, for instance, more than 50% of recurring turnover. On average a software publisher with 30 years of activity gets 80% of recurring turnover. They are presumably already profitable but can better anticipate and monitor their activity.
Focusing on the R&D investment aspect
R&D generally accounts for 33% of investments for software publishers. Is there a secret to investing in R&D while remaining profitable?
R&D investment must be concentrated as soon as possible in order to be profitable later. The research tax credit system is relatively flexible, since it allows R&D to be amortised over the year or spread over time.
The issue of the integrating aspect for profitability assessment
When it comes to integration, profitability is calculated as the ratio between the cost of the employees who worked on the project (salary + structure costs) and the project's sale price. To be profitable, this ratio should ideally be close to 2 - but 1.8 is already an excellent performance!
Focusing on the profitability of maintenance contracts
To calculate the profitability of a maintenance contract, the contract amount must be related to the time spent on the project.
The most important thing is to have rules. Depending on the market situation, it should not be sold below a minimum amount -this goes beyond simply covering expenses!- For instance, in the ERP or HR software market maintenance rarely costs below €12,000 a year: this is the amount needed to cover costs and generate profitability.
Choosing a business model: on-premise licensing vs. SaaS
To ensure profitability, long-term customer commitment is essential. But it is a challenging goal! Sometimes it is needed to adapt indicators, change in the reporting method or the type of support provided to customers.
Using the on-premise method, a software is paid once, then remains permanently accessible, with additional costs of scheduled maintenance. On the opposite, the price of a SaaS software license can be spread out over 5 years and may include other services such as maintenance or hosting. This enables to engage customers over time while being more profitable, especially after reaching that 5-year term!
What are the bundle advantages?
When developing a business in a mature market, committing to a fixed-price contract is an excellent way to preserve margin, for 3 main reasons:
Saving time: no need for micro-justification of actions taken.
Better forecast of invoicing: invoicing is sequenced upstream and the rules are clear from the start – even if a delay or postponement remains possible.
Monitoring the budget to the full extent instead of in days: no more endless debates about possible invoicing! With this fixed price bundle, everybody can focus on the production run.
Focusing on the relation between turnover and employees
If we look at the top 100 software publishers, the average turnover generated per employee ranges from €100 to €110k. If a publisher reaches €150k this may be due to a trading share in his business strategy. If it is around €80k, its business model is closer to one of a digital services company and its ability to invest is more limited.
This relationship, although not representative as a single figure, can be an indicator for a company: the more cash a company generates, the more room to invest in R&D there is… which benefits its profitability on the long run!
Focusing on per project profitability
Choosing a project-approach to profitability can be very relevant to better manage the overall profitability of a company. This gives a clear view on which project a company makes money – and sometimes, on which projects it may lose money as well!
But to do so, it is necessary to ask some essential questions:
- Is it possible to measure the profitability of each maintenance contract?
- Can identifying phases of projects which generate margin be easily done?
- How about phases that deprive the margin?
- Can the profitability of each product, module, or version there is be clearly assessed?
The type of service offered, R&D investments, recurrence and project organization... as many factors as there are ends to take the question of profitability as a software publisher! It's not just a question of covering expenses and preserving margins: it is also necessary to keep in mind the balance between the short, medium and long term and make the right decisions... at the right time!