Dating, Marriage and Enterprise Software

No traditional enterprise software company should ever have a down quarter. In fact they should grow 2%, guaranteed — with no new sales. Why?

Economic Value of Marriage

Traditional enterprise software companies have historically had recurring revenue business through charging the customer from 20% to 40% of the initial license fee for the service or maintenance of the software. Oracle, in the year before it bought Sun Microsystems was a $15B a year company with $12B of recurring maintenance revenue at north of 90% margins. More recently companies like SolarWinds have also built large recurring revenue stream by pricing the service of their software at 40% of the license fee. Service isn’t rolling a truck to fix the software. Instead, service of software is information on how to maintain or optimize the performance, availability or security of the software. As such, it can clearly be north of 90% margins. By the way, these services have been delivered in the disconnected state. In the connected state you can move from telling the customer what to do, to doing it for them — software as a service.

Getting to $1B in recurring service revenue requires hunters, sales people who hunt new customers. Building the business requires lots of dating. But once the company has achieved a large recurring service revenue business and retains/marries all of those customers there is large economic value. With no new sales, and 100% retention then just by adding the traditional COLA (Cost of Living Adjustment) you can increase revenues by 2–3%, with no new sales.

Of course the cost of losing customers and getting divorced can be big. Assume you have $1B of recurring service revenue. If just 10% decide to cancel, your hunters need to find $100M of new business to just stay even. And let’s not forget the significant cost in getting a new customer.

Marriage vs. Dating

Because all enterprise software companies start with no customers they organize around “dating”. Sales teams are organized to find the new account, the new name — or in the dating world — the new guy or the new girl. But dating isn’t the same as marriage.

If you don’t want to go thru the costly exercise of divorcing and finding a new partner, you’d be wise to focus on making the marriage work. If you want to be in a marriage that renews every year you’d organize your enterprise sales renewal group around these four key principles.

Communicate

It might sound like a cliché, but constant communication is the key to a lasting relationship. Communicate when you’re happy and unhappy, not just talking, but listening. Make generosity and kindness habitual, committing small acts of service, like doing something without being asked. Be willing to forgive the faults and failings. Treat each other with respect.

Change

As time goes on, situations shift. Be willing to adapt when obstacles, both small and large, come your way.

Invest

Making sure you still look good. Just because you’re married you can’t just take things for granted and let yourself go. That means keeping up with the market trends, industry innovations, continuing to keep yourself attractive to your partner.

Commit

This is as a long-term commitment. This might seem like a no-brainer, but those who stayed together were committed to the idea that it should last. Persevere, even if they had to go through years of relationship hardship.

Of course anyone already delivering their software as a cloud service, this should be just a refresher. You might have started out as a player but the secret to long-term success is getting into a good marriage.