Layering SaaS Revenue

One of the common themes I’ve heard from software entrepreneurs over the years is that their company hit a revenue ceiling and they were never able to break through it. By software company, I’m referring to installed software vendors, which have the challenge, like most businesses, of having to sell a number of new deals annually to maintain their revenue size. Generally, installed software vendors have a certain percentage of recurring revenue via maintenance and support contracts (invented by MSA of Atlanta in the 1970s) so they don’t have to resell the entire revenue base, but the percent of revenue that is recurring is generally less than half.

With Software as a Service (SaaS) vendors, assuming a high renewal rate (90% is considered very good), new customers represent additional recurring revenue that is layered onto the existing revenue base. One of the benefits of SaaS, besides the obvious things like more predictable cash flow, growth, etc is that there’s no limit on revenue growth as long as new customers are signed up faster than customers leave (churn). This presents an opportunity for SaaS companies to grow indefinitely — something that was historically much more difficult for installed software companies.