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Thursday, November 06, 2008

Software Business Strategy (For Start-Up)

I am just wondering how much should I make by running a software business or as entrepreneur being involved with software activities.

Let's imagine that you started alone and you have a product, and you needed like RM 3,500 per month to survive, you got to at least sell 1 piece at 3,500 rite ? But since the most popular entry-level software in Malaysia (UBS Accounting Software) is selling at RM 598.00 (with hidden cost), and you look at very useful software like Adobe Photoshop CS4 is price at RM 2,869 and technically useful software like Business Objects' Crystal Report at RM 1,800, the dream of doing one product and selling just 1 piece per month may not be feasible. And the dream of selling an off-the-shelve product for RM 5,000 is definitely out!!!!

The reason is that hot sellers like Photoshop is a huge system with so many uncounted functions and it keeps getting better.

So let's say you sell at RM 1,500 per piece, you got to sell to 3 customers per month right ? So imagine that the software is perfect that it doesn't require much support and you maintain that for a year, the next year you got to sell at higher price because you need to start making money. So, by taking into consideration that the Malaysian inflation rate is about 2.1% annually, by the next year you are supposed to sell at about RM 1,531.5.

But what we really concern about is for start-up. Assuming that you can sell the product at RM 1,500 (at year 1 on Jan 1) and just minor supporting the 36 customers for the whole year with one man show while at the same time, re-engineering the product to make it better and to create the next release for year 2 to be launched at Jan 1, then it will be great. The question is always would people really want to buy it ? Because if you projected to sell 36 copies for year 1 and if that number doesn't realize at 31 Dec, you will then be making loses for a one-man-show business.

So, you can't be sure of the sales not that the product is not useful, but whether the trend of the society is able to accommodate you as part of the culture and you can't be sure how much effort you would require to support those 36 customers and at the same time do the work for the next release all with one man effort. The risk of selling the product at RM 1,500 per piece is high (for a start-up).

Let's take a look at what Microsoft had done in the early stage.

It started off with ..

Revenues: $16,005
Employees: 3 (Allen, Gates, and Ric Weiland)
MITS promotes Altair BASIC, the computer language developed by Gates and Allen for the Altair computer. Hobbyists are ecstatic, despite the fact that, even with BASIC, there is little you can actually do with the Altair.
The "MITS Mobile" travels through the western United States demonstrating the Altair and "Micro-soft" BASIC. It also unwittingly distributes copies of not-quite-ready-for-prime-time (i.e., pirated) BASIC.

Revenues: $22,496
Employees: 7
MITS sponsors the World Altair Computer Convention (WACC) in Albuquerque, for Altair owners, dealers, programmers, and anyone interested in microcomputers. The convention features a 20-year-old as the keynote speaker: Bill Gates.

The BASIC Foundation for a company
Revenues: $381,715
Employees: 9
Microsoft's flat fee of $21,000 for what becomes Applesoft BASIC seems like a good idea at the time, until Apple sells more than a million machines with BASIC built in. Put your calculators away; it works out to 2 cents per copy.

Revenues: $1,355,655
Employees: 13
Anticipating the success of the 16-bit processor, Microsoft begins development of simulators in order to speed and simplify code development.

So according to the report, at 13 man power, Microsoft revenue achieved US$ 1 million.

So, imagine this happened to me where I would hire 12 software engineers at RM 3,500 per month, I would spend RM 504,000 on the salary and I would make a profit of Ringgit Malaysia half a million for that year. That is not bad at all.

What I learned from this Microsoft case study are:
  • Sell the product at a higher price and with lesser customers to support so that you can spend more time innovate the product and nurture future releases
  • Always have next release and customers will have to pay for it. This is particularly hard for those who have to deal with agents because customers usually prefer not to buy upgrades when there are agents to service them as compared to just buy it from the shelves. This is why UBS Software is actually charging about RM 200 per annum for support and updates (excluding the agents' interest) and it is back-tracking.Adobe is doing well in this area, people are willing to buy the next release if they have decided to ditch the old releases.
  • To follow the Microsoft model, you got to sell the product in CDs or DVDs and not download from the Internet (which is another business model totally).
  • To start up, it might be better to sell to one customer (for year 1) at higher price and still retain the rights to resell (for year 2) than trying to sell to 36 customers. To make this happen, you have to look for opportunity and not wait for opportunity. Creating and selling games is a good choice actually. Think of an idea, create the prototype and look for a publisher (for year 1).
  • There are only two types of consumer software business model namely the off-the-shelves and the Internet (you have to choose one)

And the end of the day, you had wished that Adobe Photoshop had been selling for more expensive. These products determine the price trend but not the inflation rate of 2.1% annually.

1 comment:

Cristina said...

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

Kaylee

http://www.thinkpadonline.info