Pricing: Economics of a Small Software Company
18/06/09 17:23
‘It’s a funny old game’. Someone famous once said that. I think they were talking about running a software company. My company has two facets, on the one hand I sell commercial applications that I have developed and they are priced between £10 and £100. This price is nothing to do with the effort that went into creating them, they are this inexpensive because I expect to sell dozens or hundreds of them. On the other hand I do custom software development for a specific customer which generally costs them thousands of pounds.
For example let’s say it takes a month to develop a small application, that’s 180 working hours. Assume someone like myself can earn £100K+ per year, including benefits, working in a corporate. That equates to £47 per hour. Let’s assume for the sake of argument that I wish to maintain and exceed that level of income, not an entirely unlikely suggestion. To develop that application has cost me a month in which I could have earned £8500. If I sell that application at £50 I need to sell 170 copies just to break even. Hopefully I’ll exceed that and make a profit, sometimes I won’t. It’s a good job I am not in it for the money
On a slightly different track, I may spend 1 month developing a custom application specifically for a customer, therefore their price is going to similar to the £8500 mentioned earlier. Most customers understand and accept this. Where it gets interesting is what happens if I then use technology / skills / source code developed during that custom development and create a commercial product. For £50. Assume of course that the code / technology is not in any way tied to trade secrets or proprietary information from the original customer. So now potentially my customer has paid for a good chunk of my development fees and other companies (who buy it at £50) receive the benefit of this.
Is this a problem for my customer ? Maybe, maybe not. After all, they had the advantage of having something they wanted created for them to do exactly what they required. They have the onsite support and the ability to have the software further customised as time goes on and their business changes. They become a partner.
Of course, every customer believes that what they are asking for will be easily turned into a commercial product and sold. The reality however is different. There is a lot more to creating and selling a commercial product than thinking of a price and putting up a webpage ! Where a customer has this assumption I have in the past, and will continue in the future to offer them a return on their investment, if and when it becomes a commercial product. For the customer this gives them the best of both worlds - their software is developed and they pay accordingly and if that product is then sold commercially they are entitled to a royalty.
So what is the point of this article ? Well, nothing really. I just wanted to shed some light on how it works behind the scenes within a small custom software development company. I may do further posts discussing other aspects of running an ISV (Independent Software Company), if anyone is interested ?
My Company Website: Arten Science
RSS Feed: http://feeds2.feedburner.com/Lonelyhacker
For example let’s say it takes a month to develop a small application, that’s 180 working hours. Assume someone like myself can earn £100K+ per year, including benefits, working in a corporate. That equates to £47 per hour. Let’s assume for the sake of argument that I wish to maintain and exceed that level of income, not an entirely unlikely suggestion. To develop that application has cost me a month in which I could have earned £8500. If I sell that application at £50 I need to sell 170 copies just to break even. Hopefully I’ll exceed that and make a profit, sometimes I won’t. It’s a good job I am not in it for the money
On a slightly different track, I may spend 1 month developing a custom application specifically for a customer, therefore their price is going to similar to the £8500 mentioned earlier. Most customers understand and accept this. Where it gets interesting is what happens if I then use technology / skills / source code developed during that custom development and create a commercial product. For £50. Assume of course that the code / technology is not in any way tied to trade secrets or proprietary information from the original customer. So now potentially my customer has paid for a good chunk of my development fees and other companies (who buy it at £50) receive the benefit of this.
Is this a problem for my customer ? Maybe, maybe not. After all, they had the advantage of having something they wanted created for them to do exactly what they required. They have the onsite support and the ability to have the software further customised as time goes on and their business changes. They become a partner.
Of course, every customer believes that what they are asking for will be easily turned into a commercial product and sold. The reality however is different. There is a lot more to creating and selling a commercial product than thinking of a price and putting up a webpage ! Where a customer has this assumption I have in the past, and will continue in the future to offer them a return on their investment, if and when it becomes a commercial product. For the customer this gives them the best of both worlds - their software is developed and they pay accordingly and if that product is then sold commercially they are entitled to a royalty.
So what is the point of this article ? Well, nothing really. I just wanted to shed some light on how it works behind the scenes within a small custom software development company. I may do further posts discussing other aspects of running an ISV (Independent Software Company), if anyone is interested ?
My Company Website: Arten Science
RSS Feed: http://feeds2.feedburner.com/Lonelyhacker