Why do SaaS companies get a higher multiple (in terms of revenue vs. valuation) compared to traditional on-premises companies?
Because the customers are worth more.
Recurring payments are a “bad” deal for customers in the long run.
Paying once up front for something, even with long-term support costs, is almost always a better deal.
It takes a few years for this math to play out. When Adobe switched to recurring revenue, it stopped growing for several years, as the switch hit the revenue growth in the short time. It stopped getting so much recognizable revenue up front. With recurring revenue/SaaS, you build up a lot of deferred revenue, and in the short-term, that hurts your GAAP-growth:
But as time went on, it started to earn the dividends of that strategy. Now, it’s harvesting the benefits. Growth has re-accelerated, deferred revenue became recognized revenue, and in Year 3+ … it started to pay off. The reason is customers pay more. Over time. Just not up front.
$500 up front?
Or $20 a month for 10 years.
Which would you pick? Well …
People pick the second one. Used car salesman figured this out a long, long time ago.
I mean …