March 2, 2022

Why software is the ultimate business model

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There is no other way of looking at it, we're currently in a software boom. Wherever you go or whatever you do, you'll hear "Oh just download our app" or "Did you know there is an app for that". And aside from the frictionless, user-friendly nature of software, there is one massive reason why we are in a software boom... because it makes money!

Owning a business which is a software product, app or website is the ultimate business model. But why?

Let's take a closer look at these three points:

Cashflow is King

No matter what type of business you run there is always one thing that is crucial to your success. That's money. Money is the oxygen to any business's success. No matter how you look at it, money is required to market, improve, adapt and grow. And if we take this even one step further, Cashflow is the king of all Oxygen. A constant cash flow of money is like pure oxygen energising your business and that's exactly what software businesses are built on. Cashflow is when you receive consistent and regular payments before you have to pay your suppliers and/or overheads, it's what keeps your business alive.

Let's compare a software business to say a builder.  When a builder is working on a project they need to; purchase materials, hire staff and pay for upfront expenses e.g. 3rd party contractors, certifications, planning etc. All of this comes before the job has even begun and all of these things cost money. Once these resources have been organised only then can the work begin. And finally, after working for weeks, months and sometimes years, the builder invoices their client and hopes that they get paid on time. It's worthwhile noting that in Australia the average invoice is paid after 42 days!!

To break it down, the builder has to pay for all of their resources and get the work done before they get paid. If you were to look at this on a cashflow line graph the builder is constantly relying on big spikes of income to fund their next job and hope that there is some cash left over at the end to take home as profit. Don't get me wrong, there is a lot of money to be made in the construction industry.  It just has to be carefully managed with adequate margins to ensure profit margins are consistently hit.

Now let's look at a software business. The software business model tends to be front-loaded with an initial requirement of capital. This capital is generally used to develop the software, fund the project or market it.  You can read a little bit more about Software Funding in our Free Ebook, click here to download.

But the key difference in software is that once you are at a point to go to market, you can turn on your cash flow engine. In the software space, most products run on some form of subscription model and lock in constant revenue every week, fortnight, month and year (Cashflow).  And what's even better about this cash flow model is you can constantly grow and add to it, but more about this shortly.

So you're asking who cares if you have cashflow, why is it so important? As long as the business makes money surely it doesn't matter?  We'll that's not always the case...The problem with businesses that aren't cashflow positive is that they are often relying on making new money. These types of businesses struggle to expand and find it hard to take risks due to the potential impact on their financial health.

Software businesses have the ultimate business model because they are built on a constant cash flow of money. This means that they have a greater tolerance and ability to trial, test and risk. They also don't have the added pressure of needing to find more and more money each year (which becomes harder and harder as you scale).

Effortless Improvement

Now let's look at the second point. Unlike any other physical product, software can be updated and improved with each new version. You might release a new version of your software every month or even every day if you wanted to! This means that your customers are always getting value for their money. As opposed to a physical product, let's use the builder example again... If the builder is required to improve the product they built, they'll most likely have to go through a whole new round of resources, material purchasing, planning, certification etc. etc. Where's software can seamlessly be updated and improved. What's even more powerful about this, is the ability to listen to your paying customers and act on their requests.

Often the costs to improve and work on a software product are set and you're able to easily balance new user acquisition, marketing expenses and software development. For example, if you see an influx of new users or new customer requests, you might invest 1-2 weeks/months in building out new features. You can eliminate the guesswork and continually develop your product based on genuinely data and demand, pretty cool right!

Imagine if I told you that you could start a business without asking your clients whether they liked it? We can do precisely that with software. We're able to leverage data, analytics and metrics to determine how people are interacting and engaging with your app. In turn, this information can fuel your next 1, 2, 3, 4, 5, 10 software updates.

Consistently Constant

When people start their journey in the software space, they love the energy and unpredictability of running a software business. But to be quite frank, once a software product is running it's the constants that add the true value.  These constants are things like a predictable monthly or fortnightly revenue, the ability to scale without too much extra effort and the ability to improve the product with every release. Let's go back to our builder friend again, if he was to take on a product that was 2x larger than his average project. He'll most likely have to hire 2x as many staff, 2x as many materials and have 2x as many expenses. And to add the cherry on top, probably 2x as much stress... When it comes to scaling a software product not much really changes. You don't need to double down on everything like our builder friend, the main difference is that you need to account for more people using the product. With more users comes a slight increase in hosting and more opportunity to capture meaningful data, metrics and analytics. There are very few businesses that allow you to build a product and scale with minimal adaptation. Obviously marketing your software product is crucial to its success but that's a topic for another article.

All in all, software businesses have the ultimate business model because of their cash flow friendliness, ability to effortlessly improve and state of consistency. These three pillars create a sustainable and successful business that can scale at a rate, unlike many other business types.

All of these factors work together to create an engine that can be turned on and off as you please. But don't mistake this optimism with easiness. Building, running and growing a software product is not easy. In order to be successful, you must be obsessed with your product's growth and extremely resilient! As they say, Rome wasn't built in a day and neither are successful software businesses.

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