Looking beyond RR and LTV

Standard

SAAS had emerged as very huge phenomenon in software industry around ten years ago. Most web, cloud and mobile software businesses are operating on SAAS model. Performance indicators related to startup growth are centered around Recurring Revenues, Life Time Value of customer etc.

Recurring revenue along with life time value is seen as a kind of assurance on long term opportunity of revenues and profitability for a software company. Of course we have to consider market size and share there. But most SAAS businesses evaluate themselves using these parameters. According to me, these needs rethinking.

Paradigm shift can change the dynamics of lifetime values and recurring revenue. The way digital technology and information technology is evolving, we are coming across big paradigm shift every 5-8 years (Internet, Mobile, Cloud, BigData, IoT, AI etc ).

Such paradigm shifts in world of IT and digital technoloy makes and breaks many enterprises. SAAS companies which are considered to have very attractive LTVs and RRs might not be relevant even in few years. So the other way to look at startup growth and sucess metrics is startup’s ability to stay relevant.

There are companies which are decades old and are still selling desktop based software on one time license purchase model where they dont have RRs. They are still huge and successful (Companies like Adobe or Autodesk and many more). They still are leader in their space. One reason why they were successful was they stayed relevant throughout decades. They innovated. That is obviously biggest quality to look at in order to measure the company in my opinion.

Opportunity of revenue and profit always relates to how much value a companies/products are providing to customers and markets overall. RR doesn’t ensure revenues forever obviously. If you stay relevant and keep offering new things to customers, you will keep making money. It is that simple. Because a business In general will always earn fair profits if they are providing fair values to customer in exchange of what they are charging for it.

Since we have seen early ten years of SAAS revolution, we have seen many software startups become million dollar companies and few even went public, becuse of these SAAS metrics dynamics that enables huge profit margins. I am talking about products which were just SAAS alternatives traditional software. Earning huge profits can’t continue forever though. So as in every business, there will be more compeition. And probably in next five to ten years SAAS market will become competitive in all categories of products overall. There will be multiple similar products from different companies fighting for market share by competitive pricing. And margins will have to go down. Ultimately the companies which will really stay relevant for longer and make it big will be the ones which can keep up with paradigm shift of technology. Those who can continue to innovate and excell in the product. Those who can provide the best to customer.

Ultimately, companies which innovates continuously, excels in product and stays relevant over tech paradigm shifts should be valued more, instead of looking at just “glamor” of SAAS with fancy RRs and LTVs.