This is a follow-up to my post: What Is A Software Company?
A software company’s job is to distribute the cost of making the software over many customers. If this is true then acquiring as many customers as possible is important to the company. The more customers you acquire the less you can sell your software for. If your software costs a million dollars to develop and you have ten customers you need to sell it for $100,000 per customer. However, if you have 100,000 customers, you can sell it for $10 per customer (somewhere you need profit).
Being able to sell it for less means you make it harder for your competition. If both companies require a million dollars to make the software and you have 100,000 customers and they have 10 customers, you will have very different price points, making it hard for them to reach profitability or acquire the next customer. It also makes it very hard for another company to enter the market. Because of the market dominance effect of software, we see a lot of new software companies enter emerging markets, trying to acquire enough customers early in the new technology space.
Lots of customers means that the software must solve the needs of all the customers, which means broad generalized software with lots of features. However we are seeing profitable software companies appearing that have more specialized software that caters to a market niche. How is this possible? It is because they have keep their expenses low.
“If you can keep your costs down when running a software company you can cater to a smaller group of customers.”
It is less expensive to make software now than in anytime in history. Technologies like MVC, .NET, Ruby on Rails, The Internet (for distribution), Forums/Wikis/Video Streaming (for documentation), Flash/Silverlight/HTML (for platform) and MSI (for windows installation) have greatly decreased the costs of making software. Customers want to buy software that is more specialized to what they are doing – it makes their jobs easier. Before this software was expensive, an example being television script writing software (specialized) as compared to Microsoft Word (generalized), lower costs for software companies have brought down the prices for specialty software.
Seth Godin wrote a book called Purple Cow where he stressed that in order to market your business you needed to be remarkable. One type of remarkable software is software that feels like custom software (developed specifically for a customer), however is priced like generalized commercial software. Successful new software companies are emerging that take the Purple Cow philosophy and making specialized software for niche markets by using new technologies to keep their costs down. This is Purple Software.