If you operate a software business (such as WordPress plugins) or a SAAS, it is important to benchmark your operating profit with that of other similar businesses.
Before we start, it’s important to clear up some definitions:
Gross Margin – Revenue minus Cost of Goods Sold (or Cost of Sales)
Operating Margin – Gross Margin minus Sales, Marketing, General and Admin expenses
Net Margin – Operating Margin minus Interest & Taxes
I’m looking at operating margin % here.
You can take a look at some open metrics over at Baremetrics for a start.
I also asked several of my friends in business and there isn’t one clear answer. The most common percentage I could identify is around 80%, but it’s not always clear what margin they are referring to.
For example, if the owner takes a big salary that can bring down an operating margin from 80% to 10% just because the owner is skimming all the profit.
Leaving that aside, a good rate also depends on your immediate goals for the business. What’s your desired growth rate, strategy, and end goal?
Are you investing a lot in future growth and therefore spending money on development, marketing & sales? Then your operating profit could be lower.
If you’re just letting the software be and only spending money to support it (using it as a cash cow) then the margins will be a lot higher, but you might be sacrificing the longevity of the business as other competitors are catching up or the technology of your product is becoming obsolete.
Perhaps a better ‘benchmark’ to use for this is the rule of 40:
Growth rate (%) + Profit (%) equals at least 40%
You can debate about which definition of growth and which profit you should use, but I use MRR growth rate and Operating Profit Margin.
This way you can balance investing in growth and profitability.