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Rollup Academy: Understanding revenue economics of on-premise software businesses
Pavel Prokofiev
August 02, 2023
When studying Constellation Software (CSI), people tend to focus on its playbook, value creation, and end markets. The acquired businesses’ economic models are often overlooked. It’s a shame: while the recurring unit economics of SaaS are extensively documented, perpetual licenses are much less explored.
It’s crucial to note that the majority of CSI’s acquisitions are in fact on-premise software applications, which exhibit different economics vs. e.g. AWS-hosted apps.
In this article, we delve into the revenue side of the P&L for a typical CSI target, identifying five primary income categories for VMS on-premise businesses:
SaaS Revenue
License Revenue
Maintenance Revenue
Professional Services
Hardware & Other
Do VMS vendors generate SaaS revenue? Yes, they do!
Before delving into perpetual licensing, it’s important to acknowledge that many modern VMS vendors do generate SaaS revenue. This is achieved through cloud-hosted subscriptions or on-premise installations offered on a subscription basis. Clients buy subscriptions to access cloud offering, along with related support services. All required maintenance and support are provided by the vendors, and customers are not separately charged for hosting costs.