Thank you to long-time reader Ram Ramadas for inspiring this topic.
“How does my margin compare with industry standards?” is a very popular question I get. And also one that’s hard to answer. How are margins computed? What is this “industry” we are comparing with?
Dilemma #1: How do we define support revenue?
If you charge (separately) for support, your task is easy: use the recognized support revenue for the period you are considering (not support billings, since support is typically recognized in equal monthly increments over the entire period covered by the agreement or subscription).
If you do not charge separately for support, it may not make sense at all to talk about support margin. Still, if you are allocated a portion of the overall revenue (say, 20% of the total subscription revenue), you can use that number to calculate the margin.
If you charge for certain premium support plans but deliver “free” support to other customers, I do not recommend using the revenue you do get (for premium plans) to compute the support margin. Since you are commingling expenses for premium and non-premium plans, you will get a bastardized number that is pretty much meaningless, and impossible to benchmark, to boot.
Dilemma #2: What is included in support expenses?
Support organizations typically spend 75 to 80% of their budget on headcount and that number is usually pretty easy to confirm. But are you paying for the support tools? facilities? They are pretty large numbers that may or may not be broken out to use in the computations.
Another unique feature of support is that other team like Engineering or Professional Services spend some of their time on support (fixing bugs, or working with customers to adjust customizations) and may demand that some of their costs be included in the cost of support. This is a little silly in my mind, since we are only moving money from one pocket to another of the same jacket/company. Better consider support costs for the support organization only, and ensure that the margin is high enough to fund other efforts.
All this uncertainty about what’s included in support expenses means that it’s difficult to compare with other companies’. Still, if you keep your computations consistent year to year, you can compare with yourself, which may be the most useful benchmark!
Dilemma #3: What is your comparison group?
Startups have much lower support margins than mature businesses. Indeed, they have negative margins if they are making large investments in people or tools on a small revenue base. SaaS support margins are often significantly thinner than on-premise margins. And all other factors being equal, large organizations are more profitable. Big is truly beautiful in support.
You want to compare with companies that have similar products, sizes, and maturities. Beware being forced into meaningless comparisons, as in “let’s compare our B2B, enterprise, complex support spend to this B2C, customer service investment”. Hint: the former will lose!
Would love to have readers share their experiences (even post your margin numbers???) to get a better picture of financial targets.