Thinking About Long Term Profit Margins

People like talking about enterprise software and Software-as-a-Service (SaaS) valuation multiples. Often, these valuations are presented in the context of a revenue multiple, as revenue is easier to track and more readily shared. In reality, these valuation multiples are driven by growth rate and expected profit margins. The startup phase is all about maximizing growth, but at some point growth stops and there becomes a focus on profitability.

Here are some thoughts on long term profitability:

• Greg Crabtree, author of Simple Numbers, Straight Talk, says that a 5% margin is OK, 10% is great, and 15% is amazing (this is for businesses in general and not necessarily tech companies)
• Mark Suster’s recent post Why The Media Has Been Wrong About YouTube Networks, says the multi-channel network business should be able to achieve profit margins of 50-60%
• SolarWinds, a publicly-traded software company that is unusually profitable, had a 40% operating margin for last quarter (Google Finance source)

When thinking about valuations, profitability needs to be one of the top considerations, especially if the business is past the startup phase.

What else? What are your thoughts on long term profit margins?