Benchmarking-software industry remains profitable

Despite the fact the economy remains teetered on the edge of oblivion, software companies have increased their profitability dramatically over the last year, according to a recently concluded annual benchmarking study of the small and mid-sized software industry conducted by information services provider OPEXEngine.

Benchmarking is an important part of the software industry these days as companies look to ensure that they are providing what customers want and that your company meets the performance needs.

The 2010 benchmarks were developed in concert with SIIA and were based on the confidential data provided by approximately 50 small and mid-size software vendors ranging in size from a few million dollars to $300 million in 2009 recognized revenues. Approximately two-thirds of the surveyed companies sell either all or some portion of their software products through a hosted, subscription software-as-a-service (SaaS) model.

One of the most important findings is the improved profitability for 2010, with firms reporting substantial gains as they shook off 2009's focus on expense management and switched toward improved profitability and gains.

Last year, companies focused heavily on cost cutting and management, being much more careful about their spending. In 2006 and 2007, software companies had access to so much capital that there was little concern about spending, but once the good times came to an end, companies had to retrench deeply.

SaaS companies grew during the recession as it was cheaper and competitive offering for the users and so they were not as hurt as other industries, but still had to do a lot of upfront work to acquire and grow their customer bases, according to OPEXEngine CEO Lauren Kelley.

Survey participants decreased operating expenses in sales and R&D, while increasing their marketing expenditures, suggesting that companies have to do more to increase product and brand awareness.

According to Kelley, the market for talent may have switched--salaries became more competitive as more sales people came onto the job market, travel expense dropped dramatically and marketing expense went up, showing that companies are spending more on internet marketing. Consider, for example, the growth of revenue in Google's ad sales. If you have better Internet marketing, you can hire cheaper, often inside sales people to deal with the lead flow.

Moving from broad statistics to Software-as-a-Service, the survey shows some wildly varied expenses depending on the annual run rates. For example, SaaS companies with revenues less than $25 million find themselves with higher contract values per customer compared to those with revenue greater than $25 million, ($84,000 versus $57,000) but have dramatically higher costs of acquisition per customer ($65,000 versus $11,000) suggesting that SaaS growth occurs within an organization that already has some number of users on the systems

The recurring revenue doesn't kick in, Kelley said, until you hit $25 million and the cost of the revenue balances out--this is not a target number where companies appear to hit profitability, rather a statistic explanation of where the numbers fall.

One of the key takeaways from the survey data is the realization that if your product is appropriate for a SaaS model, it offers distinct advantages, at least for the moment, assuming you can get the funding to get to profitability.