African software companies face growing pressure on profitability as dollar-denominated cloud services, artificial intelligence (AI) tools and payment processing fees eat into revenue earned in local currencies.
The mismatch exposes companies to exchange-rate volatility, with costs rising even when customer numbers and technology usage remain unchanged.
ITWeb Africa spoke to industry experts about the cost pressures facing African software companies and how they can protect their margins.
“An African software company can win every customer it goes after and still go backwards, because it earns in rands or naira and pays its bills in dollars,” said Shawn Rea, fractional chief financial officer and co-founder of Exit CFO.
Rea said software businesses could limit their exposure by matching operating expenses to revenue currencies, retaining dollar earnings to pay dollar-denominated bills and factoring currency conversion costs into their choice of payment provider.
Omar Amassine, founder and technical director of TripleW digital , estimates that African software businesses operate on gross margins of 45% to 55%, compared with 70% to 80% for their Western counterparts. He attributes part of the difference to hosting, developer tools and other infrastructure expenses billed in dollars.
Amassine said some engineering teams were moving away from managed cloud platforms towards bare-metal servers and self-hosted, open-source software to gain greater control over infrastructure costs.
The pressure extends beyond infrastructure for companies targeting international customers.
Nishesh Patel, founder of BaseAcross, which helps founders establish and operate US companies, said some African software businesses faced additional incorporation, banking, accounting and tax costs to access international payment services.
“For an African SaaS company selling abroad, the cost that never shows up on the cloud bill is the second company you build in the US just to get paid in dollars,” Patel said.
Regional cloud infrastructure and local-currency billing could help reduce foreign exchange exposure.
The Pan-African Payment and Settlement System also enables cross-border payments in African currencies, with Afreximbank projecting potential annual savings of more than US$5 billion across the continent.
However, lower headline prices do not automatically translate into savings. Businesses must also consider infrastructure reliability, security and maintenance costs.
For African software companies seeking international growth, the challenge is to control underlying costs without sacrificing product quality or pricing themselves out of local markets.
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