Making money in software: customer input not required?

“Life and Death in the App Store” chronicles the rise and fall of an app company. The programmers are skilled but the products are not always hits. Maximum annual revenue was under $1 million.

My personal theory about having a successful business is that you need to have either (1) a lower cost of capital than everyone else, (2) knowledge and skill that nobody else has, or (3) experience with customers and a market that few others have.

Way #1 works great for government cronies. They can get capital to build a factory for free. Way #2 is the path taken by a lot of MIT spinoffs. Unfortunately it carries a lot of risk, e.g., if the exciting new technology turns not to work as well as hoped. Way #3 seems to characterize most successful software companies. The founders of SAP, for example, had experience as IBM employees building accounting software for manufacturing companies.

Pixite, the company described in the article, would seem to have tremendous prospects if they were to partner with enterprises that have already identified business needs but don’t have the tech skills to implement. Healthcare.gov and associated Obamacare sites, for example, generated about $1 billion in revenue for the software industry. A company such as Pixite might be better off working together with a health insurer, health care provider, or pharma company in order to mine some of the gold in this part of the economy.

Readers: What should these guys do? Go into a business area with a partner or fold their company and get jobs at Google and Facebook?

6 Comments

  1. michiel

    March 24, 2016 @ 1:50 pm

    1

    The software market seems to have split in at least two ‘segments’. One segment is all about glorified data entry software that delivers some (supposed) cost savings with increasingly diminishing returns. The median number of different customers for this kind of software is probably one.

    The other is more like the market for books: software programs that compete not just for our cash, but our attention. This kind of software needs to be ‘fun to use’, etc. The price per copy can’t be too high, so it needs to be sold to a large number of customers to get anywhere near break-even.

    Is an author better off taking an administrative job, because the paycheck is more reliable? Probably.

  2. dv

    March 24, 2016 @ 2:04 pm

    2

    Making money as a software company is elusive. Given the skills Pixite have, they should partner with big enterprise to develop apps for them and their ilk. Big banks for example have no agility building such apps but have a desperate need. An arm’s length partnership works perfectly well and yields results. No joy in folding and joining Goog/FCBK

  3. J. Peterson

    March 24, 2016 @ 4:25 pm

    3

    This explains the phenomena of so many “orphan” apps. There are some I really like (e.g., Dock Clock). But over time they become buggy and unusable because their authors have since moved on Goog/FCBK/etc, and they lack any incentive to update them for new phones and OS updates.

    Not allowing paid updates is really sad. I’d happily fork out $5-10 every year or two to keep some of the independent apps I regularly use alive and healthy.

  4. David Wihl

    March 24, 2016 @ 8:34 pm

    4

    I didn’t read the whole article, but you gotta have at least some business savvy. C’mon building yet another photo editing software when apps are $1-10 and upgrades are free for life? They should have taken a microeconomics course or have someone with some business sense on the team.

    My formula is start with your (2) by doing something truly innovative. It has to be new and different, otherwise why would a customer buy from a new, unknown and volatile company? Then as the customer base grows, transition to (3) by selling new products to existing customers. Charge maintenance or be a SaaS to have recurring revenue and more predictable cash flow so you can finance new R&D and growth. Never give upgrades free for life (which eliminates most apps). Ideally focus on enterprise, not consumer as they have bigger budgets, need less support and are likely to be long term customers once convinced.

    This isn’t rocket science. There are well established patterns for software companies at this point. Building cheap apps with free upgrades is a stupid business idea.

  5. DE

    March 24, 2016 @ 9:01 pm

    5

    The subtitle of this entry (customer input not required) reminded me of one of my favorite Dilbert cartoons: http://dilbert.com/strip/1994-09-30

  6. jack crossfire

    March 24, 2016 @ 11:12 pm

    6

    The big thing now is the “agile startup”. This has led to a world of minimally viable prototypes which do nothing but spew adsense & crash, while popping up surveys for customer feedback. Copying an existing app & making it actually work could be a viable plan.

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