Discussions from the boardroom: What is the advantage of software companies in the current crisis? We will tell you how business logic can be applied to other industries.
Successful software companies with a long history have built up a good customer base over the years. This has its advantages in times of crisis, while it impedes dynamism in times of growth.
When a software company has been on the market for a long time, the traditional business model usually applies from the past:
- Sale of licenses: one-off effect and customer investment
- Project sales of implementation: Mostly one-time purchases, in addition to the support of existing implementations
- Maintenance turnover: recurring annually
Companies that have been in business for several years usually tend towards 25 percent license sales, 25 percent consulting business, and 50 percent maintenance revenue in the sales structure. If cloud and subscription business models have already been started, the one-off license sales will be successively exchanged for recurring subscriptions, so that recurring revenue shares of 60 -70 percent can be achieved. These are often based on contracts that cannot be terminated immediately and therefore remain stable if the company delivers modern technology, critical process components, and excellent service.
In the crisis, this means that customers may be holding back or rethinking their investments, but can or only want to change the existing contractual relationships to a small extent. Software companies with high recurring sales are therefore much better positioned for the crisis than those with high proportions of one-off transactions in the sales structure. Attention must also be paid to the cancellation rate, i.e., the churn rate from these recurring sales to annual sales.
The cancellation rate should be in the low single-digit percentage range, otherwise the contract portfolio and thus the turnover decrease.
The cloud companies switched to subscription business models rather than single license sales at an early stage and are now at an advantage.
Low churn rates better for the crisis.
In the growth phase, the large one-time sales from license and consulting projects in the P&L may be impressive – but only about 20-25 percent per year result in recurring sales through the maintenance and support contracts (due to the maintenance conditions). 20 percent to 25 percent (license sales) are just 5 percent growth in total sales, and the churn rate can still be subtracted from this.
This is one reason why software companies with high recurring sales are rated much better at low chrome rates and are well prepared for a crisis: Because only small parts of sales can be lost in the dilemma if their customers keep and fulfill the contractual relationships.