Profitability Challenges When Introducing SaaS
Biking up Haleakala, Maui - Filip Szymanski When introducing SaaS at an enterprise software company, there are a number of factors that impact EBITDA (earnings before interest, taxes, depreciation, and amortization) and the profitability challenge only gets bigger when growth accelerates. From my experience, you have to consider the following factors: Delayed Revenue. SaaS is a subscription business model where revenue is recognized as the service is delivered. So that fantastic $300k License deal the sales rep was going to close is now $150k/yr, and if you close the deal in Q4, that revenue starts the following year. When switching to subscription, you should expect a revenue dip before it starts to recover and all that “deferred revenue” starts to stack up. That is why you need executive buy-in, and if you are a public company, this has to be messaged carefully to investors as there will be an impact to EBITDA in the near term. Sales Behavior: SaaS or License? If you compe...