How do Software Companies Make Money? 4 Revenue Streams Analyzed
Software companies are among the wealthiest in the tech industry nowadays. The leading software companies have billions of dollars in revenue, while newer and smaller software companies start with tens of thousands of dollars in the first months. Even though the first software programs were released back in the past century, the phenomenon that enhanced companies to earn significantly more - Software as a service (SaaS) started to gain popularity in 1999.
Now, in 2022 among the top software companies in the world are well-known brands such as Salesforce, Microsoft, Adobe, and Google among others. Their software programs revolutionized the web throughout the time but also increased their revenue hundreds of times since they appeared. What big and small SaaS companies have in common is the diversity of their business model that brings them revenue. Based on these business models, we’ve selected the most efficient ways for how software companies make money:
#1 Product sale
The main way software companies make money is by selling their software apps. To reach this stage, software companies have to take some steps, and then choose how to sell their products. The first part starts with building a product of public interest, choosing a business model, placing the product on marketplaces or its own website, and starting the selling process.
The most interesting part is how software companies sell their products. The most popular ways are single-time purchases or subscription-based.
Single-time purchases are less popular among software companies, as they don’t bring revenue in the long term. But at the same time it is less expensive to create a single-time purchase software because companies will most likely disregard maintenance work. Also, single-time purchase software is popular among users because of the worry-free policy.
An example of single-time purchase software is Microsoft Office. Compared to its “365” alternative, you can use the Office Suite at the version, without ongoing maintenance, future updates, and no third-party tools integration.
The subscription-based model is the most popular among software companies. Depending on the app, the user has to pay a monthly or yearly subscription, but it benefits from maintenance, updates, integrations, promotions, and partnerships the software company established for the specific product.
Most of tech giants sell software products based on both models.
Windows - is a single-time purchase software, while Office 365 is subscription-based.
#2 Client retention
Client retention is another important source of revenue for software companies. Based on each type of sale strategy there are different client retention strategies.
For the beginning, let’s look at the client retention formula:
Retention rate= ((CE-CN)/CS)x100. In this formula, CE is the number of customers at the end of a specific period, CN is the number of new customers during that time period, and CS is the number of customers at the beginning of that period.
Considering the above, software companies that sell their products as a single-time purchase will get a boost of new customers at the beginning of each period, but a small number of returning customers over time. This depends if the customers are satisfied with the product they acquired and if the company launches a related product to the initial purchase that clients would be interested to acquire.
To give you an example, let’s illustrate a software program that is sold a single time. It has almost all the features that a competitor’s subscription-based software owns, but there will be no updates, and/or maintenance works.
Monthly, the software company launches new software programs that are related to the initial one and are easy to integrate with each other.
The effort to maintain a retention rate is costly, and will highly vary depending on the audience that related products are targeting. And that’s a very good reason why client retention is not relevant and profitable for single-time sales of software products.
On the other hand, subscription-based software has a higher retention rate as they completely rely on keeping a constant number of subscribers that will pay monthly/yearly subscription fees.
To conclude on this topic, revenue from client retention is best applicable to subscription-based software, rather than on single-time sale software. And this is the reason that stands behind why software companies prefer to operate with subscription-based software.
For customers, one of the most annoying features a software/app could have is advertising. Especially if the ads are in-app and come up in critical moments. At the same time, advertising is just another way to pull money out of a product. So there must be a balance between revenue and customer satisfaction that software companies should take into consideration.
Some of the largest software companies use advertising as their primary source of revenue - Facebook or Google for example. But not all software companies rely on social interaction, and by far not all software companies follow this model.
Advertising in software products could also mean affiliate marketing, platform-supported ads, or referral links to related products. As stated previously advertising is among the best ways to increase the revenue from a software product. However, things are more complicated than just placing the ad and expecting the money. Companies usually design new advertising strategies, perform A/B testing between several models, and adapt on the way to find the winning option but also to keep the balance.
So, if you’ve seen an ad inside the app you use, there are high chances that one of the following applies to you:
The advertised product is similar or related to the one you use
You’ve previously visited the page/app that’s advertised
The algorithm shows that your other apps are similar to the one that’s advertised
Based on your social media activity, you might be interested in the advertised app
Your location, age, gender among other social factors fit the targeting options of the advertised product
These are the most common scenarios why ads are displayed to you or anybody else. But of course, there are a lot of companies specializing in Mobile and Application marketing that tailor custom scenarios for each of their clients.
Here are the latest statistics about how much top software companies earn from advertising:
Google Ads revenue from advertising in 2021 - $31.88Bn
YouTube revenue from advertising in 2021 - $6.01Bn
Amazon revenue from advertising in 2021 - $31.16Bn
Twitter revenue from advertising in 2020 - $2,99Bn
Microsoft revenue from search advertising in 2021 - $8.53Bn
Adobe revenue from advertising in 2020 - $887M
#4 Using open-source
One of the biggest advantages that software companies have is the wide variety of open-source platforms. Open-source platforms and infrastructure allow companies to build software without buying a license, and other tools that would generate additional costs. Web software companies for example can use open-source frameworks to develop a web application. The same thing is available for mobile - even if such resources are fewer, and so is the collection of applications built on these platforms.
By saving money on tools and frameworks, software companies can invest their funds in other directions that will help them grow and bring revenue. Advertising, client retention, and CRM are only a few examples of where financial resources can be more effectively used.
According to Zdnet, 9 out of 10 companies use open source software for their businesses. This also includes software companies that take advantage of premade solutions to develop their products.
Sometimes cutting the resources from one direction and investing in another is the result of a quick decision. However, optimizing costs in a software company should be done only after a comprehensive analysis is performed. To avoid extra risks you may be exposed to, try contacting a business development company.
Before exploring any of the revenue options exposed above, a software company always gets back to the product and decides which way it will be distributed, and its core functionalities. The chosen model of distribution sets marketing and sales campaigns around the product. It usually depends on how flexible the product is, and what is the target audience. To consolidate the audience and customer loyalty to the product, some software companies start with an ads-free period and focus on advertising it on other platforms.
The last piece of advice to take is to always keep the bond with your software product, especially when planning its commercial side.