Monday, March 27, 2006
Three software business models
Three software business models seem to continually pop-up in the industry. There probably are more, but these one are certainly worth finding out more about.
1) Expand and Dominate. This model, characterised by the likes of Microsoft, SAP and Oracle, is one where the software footprint continually expands. It is heavily reliable on new products: aquiring new customer bases, adding new functionality and ensuring that when customers dig into their pockets, they are digging in deep. The dynamic is very strong in the industry, with the result that smaller companies with good products tend to be driven out of business, or are acquired by software behemoths with surprising speed. The model takes on its behaviour from the recognition that software revenues from any particular product tend to be high growth, tailing off into low growth and stagnation after a relatively short period of time. To sustain high growth rates, companies in this arena need to continually expand and to quickly gain a strong foothold in emerging technologies.
2) Update Harvesting. This model is not so much focused on high growth, as in sustaining the value of the product once it begins to reach maturity. Companies with products that continually need to be updated to stay relevant or content aggregators are best positioned to make money in this market. Examples would include financial software companies like Intuit, news services, premium email services. Pricing is often on a subscription basis.
3) Service Oriented. This model doesn't care so much about the value of the software, but bases its whole business model on the services that come packaged with it. This is the hot spot for the Open Source Community. Example companies in this field include Red Hat, Sun Microsystems and Sugar CRM. Software in this space cannot be trivial - it embraces complexity so that services are required to gain the maximum benefits from the software.
1) Expand and Dominate. This model, characterised by the likes of Microsoft, SAP and Oracle, is one where the software footprint continually expands. It is heavily reliable on new products: aquiring new customer bases, adding new functionality and ensuring that when customers dig into their pockets, they are digging in deep. The dynamic is very strong in the industry, with the result that smaller companies with good products tend to be driven out of business, or are acquired by software behemoths with surprising speed. The model takes on its behaviour from the recognition that software revenues from any particular product tend to be high growth, tailing off into low growth and stagnation after a relatively short period of time. To sustain high growth rates, companies in this arena need to continually expand and to quickly gain a strong foothold in emerging technologies.
2) Update Harvesting. This model is not so much focused on high growth, as in sustaining the value of the product once it begins to reach maturity. Companies with products that continually need to be updated to stay relevant or content aggregators are best positioned to make money in this market. Examples would include financial software companies like Intuit, news services, premium email services. Pricing is often on a subscription basis.
3) Service Oriented. This model doesn't care so much about the value of the software, but bases its whole business model on the services that come packaged with it. This is the hot spot for the Open Source Community. Example companies in this field include Red Hat, Sun Microsystems and Sugar CRM. Software in this space cannot be trivial - it embraces complexity so that services are required to gain the maximum benefits from the software.
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