James Dixon’s Blog

James Dixon’s thoughts on commercial open source and open source business intelligence

Re: Subscription vs. license: When do you take your profit?

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In response to Matt Asay’s post:

http://news.cnet.com/8301-13505_3-9952545-16.html

This is interesting Matt.

It is a common assumption that a proprietary vendor makes their money upfront with the license fee. In a lot of cases the assumption is not valid. For example I have heard that SAP makes $4 to $5 in services for every $1 they get in license revenue. You can look at the SEC filings of publicly-traded enterprise software vendors to find out where their profit it. In the cases that we looked at they are spending about 35-40% of their overall budget on sales and marketing expenses and get 40-45% of their revenue from the sale of new licenses. In these cases almost all of the upfront license fee is used to fund the expenses of selling the software to other people next quarter. In some cases the sales and marketing teams are authorized to spend over 100% of the license fee in order to make a sale. In these situations the sale person is quite happy to make a sale that is close to (or even below) the break-even point for the company, they’re just trying to make their quota. After the initial sale, in order to be profitable, the vendor will need to augment the deal with services (low margin), training (low margin) or maintenance (higher margin).

So your large enterprise buyer is possibly mistaken. He may be in the situation where he ‘thinks’ the vendor will be happy just making the sale but where the vendor needs to find ways to augment the sale to make any profit at all.

Written by James

May 28, 2008 at 2:58 pm

Posted in licenses

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