Choose your revenue model

From competitive info, buyer personas and go-to-market strategy, a company gets to pick its revenue model(s): A license model where customers initially buy the right to use the software perpetually, and later pay for maintenance and updates; and a subscription model where people rent the software with a fix subscription, where maintenance and updates are included. While there’s a tendency to choose for a subscription model when dealing with SaaS/cloud software and a license model when offering on-premise software, both are perfectly suitable for all types of software delivery models (with a bit of engineering help).

Why the license model works best

In the early days of a company, cashflow is like air, you don’t realise its importance until you miss it. With companies wanting to grow organically or without enough cashflow (and patience) to survive the customer acquisition period, seeing substantial revenues coming in from first customers is a relieve. Also, large organisations often have internal policies dictating them to own the software they use, while still being able to put relevant capital expenditure (CAPEX) on their balance.

Why the SaaS/Subscription model works best

For a majority of customers, shifting from perpetually buying their software (CAPEX) to renting software for what they’re actually using (Operational Expenditure/OPEX, pay as you grow) is a clear financial risk advantage. Furthermore, upon controlling its churn, a vendor will see more SaaS revenues coming in over a customer lifetime, than license+maintenance/updates revenues (cfr. above example figure; from month 43 onwards).

Free-of-charge

Companies may choose to gain revenues through entirely different channels, and provide their users the software/service free-of-charge. The goal for these companies is to grow its user-base as activa which eventually will either represent marketing revenues (as in: selling user profiles to 3rd parties), or service revenues (up-selling complimentary services). An open-source revenue model is typically the latter.

Financial risk 

While each model has its own particular metrics, certain generic metrics should always be considered. The customer-acquisition-cost (CAC) is the average cost of all operations. that is needed to close and retain a customers. The life-time-value (LTV) is the average revenue companies is receiving during that customer’s lifetime—from the first invoice to the last, when churning. A well-running business should see its LTV at least 3 times its CAC, while recouping its CAC during its fiscal/one year.

Checks and balances

More than laying the financial foundation for the company’s vision and mission, the financial plan provides targets towards each phase of the customer process, such as amount of website visitors, registrations, leads, sales qualifications, closures, up-selling, churn. Upon reaching these targets, the company will decide wether additional funding is needed, whether product cycles will have to accelerate, wether resources should be added or not…or review and alter the original plan in light of the new economical reality.

Fund raising

To bring a new product to the market, to pre-finance the customer acquisition cost in a SaaS model, or to expand across international markets, a venture may need to attract funding. There are all types of investors, each with some specialisation in financing new ventures against a lucrative return. These investors will expect a viable financial plan with clear market potentials, objectives and milestones, and exit strategies, before committing to bringing in additional funding.

Flexible worst-case scenarios

Financial planning is not an exact science… Well, the math obviously is, but the myriad of assumptions a company has to make is always depending on factors which are highly unpredictable. One way to avoid not meeting objectives is foreseeing multiple (worst-case) scenarios and making sure finances are based on flexible outcomes. Hence the general wisdom: “always get more funding than [what you think] is needed”.