Featured Article from Software Licensing

How to Drive Recurring Revenue in Software Licensing that Draws Investor Attention

June 22, 2016

In the business world, the conversations around strategies and goals tend to focus on profitability. A business needs to drive sustainable revenue that not only covers ongoing costs, but also includes the profit margin. It should be the goal of any business plan, regardless of the product or service. In the area of software licensing, it’s both critical and challenging to achieve.

To be the most successful, a company needs to create an environment where they are driving recurring and predictable revenue. It not only helps to create a healthy bottom line, it’s also essential to IPO success. This topic was recently covered by software licensing solution provider, Flexera Software in a blog post. The primary point is that when recurring revenue strategies are done well, the company has the fuel for necessary growth and predictable outcomes. Yet many fail to hit these targets.

According to Flexera Software, industry best practice maintenance renewal rates run 85 – 95 percent. As essential as renewals are for software licensing revenue, most companies don’t achieve anywhere near this rate due to an inaccurate installed data base. Traditionally speaking, software producers sold their software on a perpetual basis, so all revenue is recognized in full when the transaction is completed.

The problem with the perpetual model is that it creates revenue streams that are uneven. Large sales are typically followed by low or no sales until the next large one hits. In this model, renewal rates for the maintenance related to the license are also typically lower. To help offset this challenge in software licensing, a number of companies are focuses on better management of their recurring maintenance revenue.

One question that may come to mind in this conversation is why should you care? As long as you’re driving revenue and you’re profitable, why should it matter when it comes in? In an IPO situation, investors tend to lose enthusiasm when there are peaks and valleys in revenue realization. Subscription-based pricing allows for a smoother revenue line that is more predictable and less susceptible to large swings. This enables investors to better project future-growth and required cash outlays. 

To better drive recurring revenue, important steps can be added to the software licensing process, including maintenance renewals and subscription licensing models. The addition of entitlement management and electronic software delivery also enables the instant availability of new releases and provides for an always-accurate view. These simple changes can not only help even out revenue streams, it will also make your company much more attractive to investors. 

Edited by Maurice Nagle
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