Why Subscription Revenue Is Lifting the Enterprise Software Industry—And Investor Expectations

Selling software as a service instead of a product has been a boon for enterprise software companies. But will their growth translate to high profits?






Key Takeaways

 

  • The shift from perpetual licenses to subscriptions has altered the competitive landscape of the enterprise software industry.
  • The subscription model, known as Software as a Service (SaaS), is expanding market potential by allowing customers to rent software at affordable monthly payments rather than buy it at a large upfront cost, and to avoid the cost and complexity of hosting applications on their own network servers.
  • SaaS gives software makers the opportunity to extract higher fees from customers over time—if they can sustain high renewal rates.
  • However, the same cloud technology that enables the SaaS model has increased overall competition for software makers. Potential rivals can rent computing infrastructure from the likes of Amazon Web Services, lowering barriers to entry.
  • Though many SaaS companies report high growth, their profitability varies widely and many are not yet profitable. Their ultimate profitability will depend on their ability to retain their customers, to control their customer acquisition costs, and to achieve scale economies.

Disclosures

 

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