By David Duncan, VP of Sales, Epos NOW
Should software companies be more concerned with top-line or bottom-line growth?
First off, let’s define the meaning of top line and bottom line growth. Investopedia defines them as the following:
“The top line refers to a company's revenues or gross sales. Therefore, when a company has ‘top-line growth,’ the company is experiencing an increase in gross sales or revenues. The bottom line is a company's net income, or the ‘bottom’ figure on a company's income statement.”
Next, to answer the question posed above, the honest answer is that you need both. Top line revenue essentially pays the bills. Bottom line revenue, or recurring revenue as it's otherwise known, provides the oxygen to fuel rapid growth.
To give you a real-life example, at Epos Now, we started off trading as a reseller in the Point of Sale market, and only charged upfront for the POS system. The revenue from the monthly support package or SaaS went directly into the reseller’s pocket. Therefore our top line revenue was very strong, but our bottom-line revenue was very weak.
As a result, we lived hand-to-mouth every month, and the anxiety and stress was especially real on the last day of the month when we needed X amount of money brought in to pay the rest of the bills. When we launched our software in 2012, it allowed us to directly charge the customers a monthly fee for accessing the software and receiving technical support. We only charged between $39 and $69 per month depending on the service, but over time these little payments ballooned up into thousands of dollars coming in each month, making us more profitable and increasing our bottom-line revenue.
Within three years we were almost at the $500,000 per month mark, and now seven years in, well, you can imagine. This buildup in bottom line revenue allowed us to grow at a rapid pace in the UK organically, and then launch an office in the USA without any external investment. There is no way we would have taken that risk of launching in the USA if we hadn’t had strong bottom line revenue.
Top line revenue growth year-over-year demonstrates a company’s strength, and its sales and marketing teams’ capability to produce more leads and convert more customers. Additionally, it highlights that there is an increasing need in market demand for your software/service. Companies need to be careful about having too high a contrast between recurring revenue and top-line revenue on their balance sheet, as this will look like market stagnation to investors, or lack of innovation in sales and marketing. This can be dangerous in a very competitive market space. In most industries, an average LTV (lifetime value) of a customer spans from 12 to 36 months, so you need to ensure you’re filling the pipeline with more new business every month than the previous month. As a baseline, at Epos Now we look for just under 50 percent of our revenue to come from recurring revenue and the rest to come from new business sales.
One huge factor that can influence bottom line revenue growth is churn. Churn is probably one of the most important metrics that SaaS businesses especially need to be on top of. Let’s say you have 1,000 customers on your platform and onboard 100 customers each month on average, but you lose 20 a month. The monthly churn will only be around 2%. This doesn’t sound like a lot but multiplied by 12 months in a year that's 24 percent of your customer base that is churning off the platform every year. Now imagine if you didn’t bring on those 100 new customers every month, you would lose your entire customer base in 50 months, or a little over four years. Crazy, right!? This example highlights precisely why you need top-line revenue growth as well as bottom line growth.