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| Home - Industry Article - Oct 06 Issue |
Vendors, Not All Revenue is Equal |
By Olin Thompson, Principal, Process ERP Partners
For application vendors, most say that all revenue is good revenue. While this is true, revenue comes in many varieties, and not all are equal in terms of value, cost or risk.
The vast majority of application vendor revenue is derived from maintenance or license transactions. The following are types of software company revenue:
| Maintenance |
Annual maintenance fee from existing account |
| Add-on Modules |
More modules within an existing account |
| New Site |
New location within an existing account |
| New Account |
First time user |
| Replacement |
Replacing an existing product |
| Consulting Services |
Services in support of the above efforts or for general improvement of a customer's use of products |
Consulting services are typically tied to the other five license related revenue types. Although consulting services not associated with license revenue have potential for vendors with large install bases, we will focus on the license related sources. These revenue types can be compared in a number of ways. First we will compare them and then we will explore why the various relationships exist.
First, we will look at revenue per transaction (or deal) versus the length of its sales cycle. Maintenance revenue can have a very short or even a zero length sales cycle. A competitive replacement is typically a very long sales cycle; the prospect has experience in buying and using software and is often aggressive in looking at the details of the "new system".
Next, revenue types can also be examined by comparing revenue per deal with the odds of closing the deal type.
Finally, we can compare the odds to close with the revenue per deal by combining the two previous charts.
Analysis
The length of the sales cycle is an indicator of the cost of sales. When combined with the odds-to-close, we see the total cost of sales versus revenue in a new light. For example, the cost of sales for New Accounts is very high due to the extended sales cycle. The low odds-to-close replacement deals are even more difficult and costly.
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