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.



The “Fundamental Thinking” series presents the perspectives of Harding Loevner’s analysts on a range of investment topics, highlighting our fundamental research and providing insight into how we approach quality growth investing. For more detailed information regarding particular investment strategies, please visit our website, www.hardingloevner.com. Any statements made by employees of Harding Loevner are solely their own and do not necessarily express or relate to the views or opinions of Harding Loevner.

Any discussion of specific securities is not a recommendation to purchase or sell a particular security. Non-performance based criteria have been used to select the securities identified. It should not be assumed that investment in the securities identified has been or will be profitable. To request a complete list of holdings for the past year, please contact Harding Loevner.

There is no guarantee that any investment strategy will meet its objective. Past performance does not guarantee future results.

© 2022 Harding Loevner