We’re continually talking to software industry executives who are trying to do what is almost impossible, grow at phenomenal rates with high profits and little spending on sales and marketing. We’re also seeing many startups in the industry with what can only be termed, phantasmagorical forecasts. The question is:
- How much growth and profitability should you be targeting?
- How much should you be spending on Sales and Marketing versus Research and Development?
To answer these and other questions, we looked at about 280 public software companies and used their most recent SEC filings to compile software industry benchmarks.
We set out to answer these same questions 8 years ago and thought it would be interesting to update it. The funny thing is that other than a bit better profitability, little else has changed. The fundamental operating ratios for companies in the software industry are much the same as they were eight years ago.
- There is a very distinct tradeoff between growth and profits. If you expect to grow more than 50% then you should expect to lose money. However, if you are satisfied with growth rates of between 10% and 20% it should be possible to earn profits around 7% of revenue.
- Gross margin rates of about 65% are to be expected at all sizes of companies but if you want to earn a healthy net income then it pays to get gross margins up to above 70%.
- Successful firms spend 26% of revenue on sales and marketing.
- And this is about twice as much as they spend on research and development.
- You should target to spend 10% of revenue on general and admin if you want to optimize profits.
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