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.
Thoughts?
So if we were looking at a growth of 15% in software sales from 19-20 and then our profit percent is roughly 17% (basically net) then 32% in 2020 for a SaaS business ins’t that bad? We are in the event fundraising business which is upside down right now and feels more like the web’s wild west of the late 90’s and 00’s.
This is a great article. Thank you!
Welcome Matt. I think those are healthy margins indeed.