Compared to 20 years ago, modern software companies are 10 times more resilient when the inevitable recessions, financial busts, wars, and other crises disrupt the economy.
This is one of the reasons why SaaS companies are much more valuable now.
The magic of the recurring revenue business model makes modern software companies so resilient.
Here’s what the B2B software business model looked like before SaaS took over 10-15 years ago:
- Â You sold a one-time license to your software and could book all that revenue upfront.You could literally sell a $100,000 license deal and book that entire amount on the last day of the quarter. Phew!
- Â If you sold to medium, large, or enterprise businesses, you got a 20% maintenance and support fee every year to cover upgrades and support.This was generally ignored and support/service was not valued as much as the sales team that brought in the big new deals.
- Â If you sold to small businesses or individuals, you sold a one-time license (that came in a box in the ’90s) like Windows or Quickbooks. Most of your revenue came from selling new customers, every quarter and every year.You marketed your occasional upgrades to sell more to your “installed base” of customers. Some SMB companies charged for support, but most didn’t, so support was underfunded.
That’s what most software companies looked like before 2010. SaaS was still young and big software companies procrastinated changing their business model, which was the DNA of their business.
The old one-time-sale model created many bad habits and made these businesses very fragile.
- For most enterprise software companies, 80-90% of the revenue would come in the last week of the quarter as deals were negotiated, which is a hair-raising way to run a business.
- You got the revenue and cash up front, so all the attention was on closing the sale and the first months with the customer. Not much attention to customers after that, since there was minimal revenue impact, even if they stopped using your software.
- When a recession hit, the stock market busted (2000, 2008) or there was a crisis like 9/11, NEW SOFTWARE SALES SLOWED BY 50% OR MORE in the year, often in one quarter.
You missed your revenue target by 25% or 50% very quickly. Layoffs, crazy deal-making, desperate M&A, and financial shenanigans ensued.
Most software companies grew fast and were sold or gone in 5-7 years.
Recurring revenue SaaS businesses have 80-90% of their revenue already booked at the beginning of a new quarter.
SaaS companies are focused on keeping customers happy with a focus on growing continuous value for customers.
When a recession hits in your industry, your SaaS company will still have most of your revenue next quarter–even if you don’t add one new customer.
It’s very hard to kill a SaaS company with its virtuous flywheel business model.
All hail the recurring revenue business model of SaaS!
