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Software Support Financial Fundamentals Understanding margins, funding, and financial models of support. T H O M A S J . S W E E N Y loss center or cost center? What is the appropriate funding for support? How does support drive revenue? What is the expected margin for support? SHOULD YOU CHARGE FOR SUPPORT? If you want to make money from support, you need to charge for it, and most software companies do. The ma- jority (88.9 percent) of software companies offer some form of fee-based support. Not all support programs are the same. Some are extensive with many choices for the customers to select, while others are limited in scope. Fee-based support options are not always presented to the customer as a choice. In some cases, the support fee may be bundled with the product price, included as part of a subscription, or included as a compulsory first-year requirement. Very few companies offer free support. The starting point for this discussion is that support should be sold. A well-defined support offering is far too valuable for both customers and the company offer- ing it. For customers, support is a means to access the expertise they need to help apply the product to its full- est potential. For the vendor, good support is too costly to give away, and the financial benefits of the ongoing annuity are too attractive not to pursue. You should sell support unless: (1) Your product or service is so simple there is no reason a customer would need assistance; (2) Your market is so competitive that introducing fee- based support would create a significant competitive disadvantage; or (3) Your product is used at a time or in a way that there is no practical way to deliver support. PROFIT AND LOSS OR COST CENTER? Most software companies manage their support busi- ness as a cost center (59.2 percent), and the rest man- upport has evolved from a tactical necessity to a strategic imperative for software com- panies. Support accounts for more than half of revenue for many companies with average margin performance of 67.8 percent and far higher for companies that have well-developed support programs and policies. To achieve these returns, companies spend between 2.5 and 15 percent of total revenue to fund support operations. This by itself is a reasonable return on the investment in support, yet it represents only a fraction of the full potential impact of a well-de- fined support strategy. For many companies, 80 percent or more of revenue comes from existing customers in the form of new or repeat purchases and renewal of subscriptions (XaaS and renewed support and maintenance agreements). The value of a customer relationship is not measured solely on the initial product sale but the lifetime value of the relationship over many years. Support also plays a critical role in sustaining the customer relationship by continually engaging customers in a meaningful way long after the initial product sale. Support is the key to sustained financial performance of the entire business. Support not only provides a healthy revenue source, but it also is key to continued success and customer loyalty. Managing, measuring, and optimizing support is a strategic imperative that software companies must embrace to achieve optimal business performance. While many software compa- nies have well-established and vibrant support initia- tives, there are several questions to ask if you are in the process of developing or transforming support. Should support be provided for free or sold as a fee-based pro- gram? Is it better to manage support as a profit and S OPINIONS & CHALLENGES Index By T. Sweeny SOFTWARE SUPPORT FINANCIAL FUNDAMENTALS SOFTWAREEXECUTIVEMAG.COM OCTOBER/NOVEMBER 2017 12

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