Software companies operate in a highly demanding market, one that’s still recovering from the economic headwinds of 2023. But in hundreds of conversations with product decision-makers, it’s clear that attention is returning to growth. Most will be familiar with the Rule of 40, which states that for a software company to be sustainable, the combined value of its revenue growth rate and profit margins should equal or exceed 40%. We find that more focus is now being placed on the second part of that equation, as improving net-profit margins is something software company executives have significant control over.
Scaling a software company is not just about growth anymore—it’s about profitable growth, and executives have a lot of options in how they pursue it. In this article, I’ll run through reliable strategies for doing just that, from building new products, to entering new markets, optimizing costs and more. Let’s get started.
Differentiation. Value. Profit.
“Innovation”—it’s usually the first word I hear when discussing growth with product decision-makers, and with good reason. Innovation creates differentiation, which in turn creates value, and ultimately profit.
To innovate effectively, you have to truly understand your customer’s needs and work backwards from them. There are different ways of doing this. You can employ the “five whys” method—keep asking “why” until you get to the root of the issue you’re looking to solve. You can also write a press release or FAQ about the product you plan to build and use that as your North Star throughout development.
I recently worked with a software company in the security space that wanted to expand into new regions and attract global customers. To do that, they knew their security operations center (SOC) had to meet strict data protection requirements. We worked backwards from that target state across a multi-week engagement. This process can include simple exercises like the ones mentioned above, to rapid prototyping, or even engaging a specialist partner.
Elevate Your Customer Experience
Never underestimate the differentiating power of superior customer experience. GitHub is a great example. It’s built on top of an open-source software configuration management tool. How do you build value on something that’s already open source? You make it easier to use and operate. A differentiated user experience was one of GitHub’s main areas of differentiation over the open source Git project when it was acquired in 2018 for more than $7 billion.
And it’s not just the day-to-day customer experience that’s important. I frequently hear from chief product officers (CPOs) who are frustrated that it takes too long for customers to onboard their products, which also makes it hard for them to pivot to a product-led, go-to-market strategy. Time-to-value is just as important as a solid day-to-day experience, and every software company should be striving for rapid product onboarding.
Adventures in AI Innovation
Creative application of artificial intelligence (AI) can drive profitable growth by increasing efficiency, enhancing decision-making and modernizing existing systems. And with cloud providers making AI technologies more accessible than ever before, software companies are putting them to good use.
Did you know the average traffic light intersection is reprogrammed just once every five years? A software company I’ve been working with is combining computer vision and AI technology to analyze traffic using sensors for on-demand reprogramming. Another customer is using AI to provide human resources (HR) staff with nudges during the hiring process, helping them make more informed decisions based on diversity, equity and inclusion. Many software companies are currently adopting generative AI to improve user experience through natural language, task automation, and to generate executable artifacts from programming languages to low-code apps to data integration pipelines.
Spend Less, Profit More
One of the best ways to improve profit margins is to reduce spending. And yet I often see software companies expending valuable resources on non-differentiating technologies or features. Ask yourself, how can resources be redirected to focus on profit-generating services and features?
If your teams are bogged down by time-consuming manual work, think about how technology can be used to alleviate that burden. It’s important to observe your infrastructure to understand how much it costs to deliver services, the costs to support individual customers, and which features generate the most value so that product team can make informed economic trade-offs. Once again, AI can help here. From conversational chatbots, to virtual assistants and coding companions, generative AI can help free up your teams, accelerate product development cycles, reduce costs through automation and more.
Sell Your Existing Products to New Customers in New Places
Creating net-new software products is exciting, but could you also drive profitable growth by expanding the market for your existing products? One way of doing this is geographic expansion. Many of my conversations with product owners touch on this subject, and there’s a lot to talk about. You’ll need to consider what sales, marketing and infrastructure staff you have in place to support your expansion, how it will impact your operating model, and what new rules and regulations you’ll need to comply with.
Expand Your Portfolio Through Acquisitions
Many software companies expand their product portfolios through acquisitions. Building a portfolio of complementary products as part of a broader platform play is a great way for software companies sell higher in enterprise customers, win more business and drive profit growth via cross-sell and up-sell opportunities.
If you pursue this strategy, consider how you will approach bridging cultures and technologies acquisition. That could include anything from rewriting UIs to conducting a full data migration.
Channel Expansion
By making your services available on one or multiple cloud marketplaces, you can accelerate co-sell opportunities and shorten the product acquisition cycle. It’s also a great way to enter adjacent markets by giving you exposure to new customers.
Channel expansion is a common tactic for software companies looking to sell to small and medium-sized businesses (SMBs). If you think you could be targeting more than just enterprise customers, this might be the strategy for you.
Growth Opportunities in Every Direction
This is by no means an exhaustive list of strategies, but it does illustrate some of the levers cloud-native software companies can explore in pursuit of profitable growth. Think creatively. Bringing an innovation to market might be the next best move for your business, or maybe it’s an acquisition, or perhaps it’s exposing an existing product to new customers. Whatever strategy you set, always start with the customer and work backwards from there.
And don’t forget, expert guidance is available if needed—don’t hesitate to seek it out. Public cloud providers and software specialist partners have a wealth of available resources at their disposal to help software companies define and execute a profitable growth strategy.
