Professional Services Revenue as it Relates to Software Startups

In the software business not all revenues are created equally. Revenue from subscriptions or licenses is significantly more profitable and scalable compared to revenue from professional services. When talking to entrepreneurs I like to get a feel for the mix of revenue from subscription/license vs professional services. One of the simple proxies for this is the number of employees they have in professional services.

Here are some notes on professional services revenue for software startups:

  • Professional services revenue as a percent of total revenue is often super high for early stage startups still looking for product/market fit (e.g. they are doing consulting work to pay the bills)
  • Once a product takes off services revenue is typically a small percentage of overall revenue, especially if channel partners (value added resellers) are used
  • As the core business and market matures, many software companies add more services as a way to grow even though margins decline
  • Some services companies masquerade as software companies when in reality the software is for lead generation for their consulting work or their product requires so much customization it doesn’t get much in the way of economies of scale

When thinking through startup opportunities, and evaluating companies, it’s important to understand how the services component fits in.

What else? What are some other thoughts on professional services revenue as it relates to software startups?

2 thoughts on “Professional Services Revenue as it Relates to Software Startups

  1. While I appreciate the point, David, this sounds like it is mostly in reference to professional services that cover for gaps in product capability: implementation, support, operational assistance, etc. It also implies that all elements of your value proposition are most effectively and efficiently delivered by your product rather than people.

    I would assert that many successful products, software and otherwise, require a service component in order for the full value to be derived by the customer.

    Can you imagine if we were all left to our own devices to service and maintain our vehicles once we bought them? And ask any car dealer which is the more profitable revenue stream: vehicle sales or service.

    Just making the point that not all services can be evaluated the same way.

    • Services are a critical component for almost all enterprise software products. I think it’s important to point out that when evaluating a potential startup to join it’s critical to find out what you’re getting into. Typically the personalities that like consulting companies are different than the personalities that like product-oriented companies.

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