Over the last few months, we have taken time to study the economics behind SaaS and other digital businesses more closely.
What interested us was not the familiar argument that recurring revenue is valuable, or that a digital business can serve more customers without its costs rising at the same rate. Both may be true.
The more difficult question is what happens when the business begins to grow through exceptions.
In the early stages, saying yes often feels sensible. A valuable customer asks for a custom integration. Another wants a different onboarding process. A larger account negotiates additional reporting, longer payment terms or regular access to senior members of the team.
None of these decisions looks particularly damaging on its own. They help close revenue, protect a relationship and keep growth moving. But over time, the operating model begins to change.
The product may still be sold as a repeatable subscription, yet the company is now supporting several slightly different versions of it. Developers spend more time maintaining customer-specific work. The product roadmap is interrupted by urgent account requests. Support becomes harder to standardise, and senior people remain involved in customers that should no longer require their attention.
The accounts will not necessarily show this clearly. Revenue is still recorded as recurring revenue. Payroll appears in one place, hosting costs in another, and contractors and software somewhere else. The cost of the additional complexity is spread across the business.
This means a customer can appear commercially attractive while quietly consuming far more of the organisation than the contract suggests.
We have come to think of this as a question of revenue quality, rather than simply revenue quantity.
Two customers paying the same annual amount may have completely different economic value.
One uses the standard product, pays on time and can be supported through the normal operating process. The other requires custom development, repeated intervention and knowledge held by two or three key employees.
On a revenue report, they may look identical. Inside the business, they are not remotely the same.
There is a similar issue in project-led digital businesses. A project can achieve its invoiced value and still leave the company in a weaker position if it occupies scarce senior capacity, creates no reusable capability or establishes a level of service that the original price does not recover.
The immediate margin is only part of the picture. The complexity left behind continues long after the invoice has been paid.
One starting point we have been examining is to look at each material customer or revenue stream through three separate lenses: the margin it reports, the capacity it absorbs and the complexity it leaves behind.
This changes the questions asked before agreeing to custom work.
Can the work be reused for other customers? Is its ongoing support being priced properly? Does it strengthen the core product, or does it move the company further away from the model it intends to scale?
Not every exception should be rejected. Some become valuable product improvements or open an important market. The danger is accepting them without understanding what they are gradually turning the business into.
Growth is often discussed as though more recurring revenue automatically makes a digital business stronger.
In practice, some revenue compounds. Some revenue simply accumulates obligations.
At N.P. Ummer Financial, we have been spending time understanding that difference and what it means for margins, capacity and the financial decisions made before growth is pursued.
The value of recurring revenue does not rest only in the fact that it returns. It also depends on what must return with it.