How software companies make money

Once software is built, one more customer costs little to serve. HubSpot, which sells software to businesses, kept 84% of its revenue in 2025 after paying for servers, support and other costs of delivering it. Dropbox, the file storage company, kept 80%. That share is called gross margin. Card fees count here too: Stripe, a payment company, charges 2.9% plus $0.30 per card payment at the time of writing.

So software owners watch one number above all: monthly recurring revenue (MRR), what all customers pay in a month, added up. Each month it changes in three ways. New customers add to it, upgrades to bigger plans add more, and cancellations take some away.

Here's an example month. A tool that charges $25 a month starts with 800 customers, so $20,000 a month. It wins 80 customers, worth $2,000, gets $600 from upgrades, and loses $800 when 32 customers cancel. It ends the month at $21,800.

These numbers are our example.

Churn is the share of customers who cancel each month. In the example month, 32 customers cancelled, out of the 800 customers at the start, so churn was 4%. That sounds small, but it adds up. At 4% a month and no new customers, only about 61% of the customers would be left after a year: about 39% gone.

These numbers are our example.

There's no public figure for a typical small company's churn. Surveys and big companies' reports measure retention instead, over a year. In a survey of business software companies for 2025, the median company kept 84% of its existing customers' revenue after cancellations and downgrades. That's about the same as losing 1.4% each month. Companies whose customers paid under five thousand dollars a year kept less: a median of 80%.

Upgrades can fill the leak. Net revenue retention counts the existing customers' upgrades too. HubSpot's was 103.5% in 2025: taken together, its existing customers paid more than a year before, even after the ones who left. Above a hundred percent, revenue grows even in a year with no new customers.

Before enough customers pay, a young software company spends more than it takes in. The cash it loses each month is its burn rate. Runway is how many months the cash lasts at that rate.

Take an example startup with $1.2M in the bank. It spends $180,000 a month and its customers pay $80,000, so it burns $100,000 a month. If nothing changed, its runway would be 12 months.

These numbers are our example.

Pay is a big part of it. A software developer's median pay was $135,980/year in May 2025, about $11,332 a month before payroll taxes and benefits. If the founders pay themselves, that's part of the burn too. Many startups fill the gap with investors' money: the median seed round, an early round of investment, raised $4.1M among US software startups on Carta in the six months to July 2026. In return, investors get part of the company.

Winning customers costs money up front: ads, free trials, salespeople. People call it customer acquisition cost, or CAC. How much a company spends depends on how it sells. Dropbox, which sells mostly online, spent 15% of its revenue on sales and marketing in 2025. HubSpot, with a big sales team, spent 44%.

A customer pays that cost back slowly, from what's left of each payment. Say the example tool spends $300 to win a customer who pays $25 a month, and keeps 80% of it after servers, support and card fees. That's $20 a month, so it takes 15 months to earn back the cost, and only if the customer stays that long.

These numbers are our example.

In the 2025 survey, the median payback was 16 months. Companies whose customers paid under five thousand dollars a year took a median of 11 months; those whose customers paid fifty to a hundred thousand dollars took 22 months. Meanwhile the company pays for the next customers too, which is why fast growth can use up cash quickly.