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Insights / Blog / Agility & Organisation

Software Companies: Project- or Product Business? Advantages and Disadvantages of the two Business Models

June 28, 2017
Alain VeuveAlain VeuveManaging Director, AOE Switzerland

I have no idea how many times I’ve been asked in the past few years what a software company must do to make the transition from a project-based firm to a product-oriented business model. Apparently, this is a topic that worries many software companies.

Companies aren’t aware of the risiks of the product-based business model

I’ve made it my habit to ask from the outset, I have made it my habit to ask for the first time, why such a business model change seems desirable. Most companies replied that the project business was simply too laborious, that there was too much pressure involved, and that profits were inadequate.

For those companies, the product-based business model is a savior in a situation that many project-based software companies know – at least at first. I maintain that this attitude is extremely short-sighted, for the product-based business model entails numerous different challenges, which the companies are not even aware of.

Marketing & Business Development is a significant cost factor – but at the same time unavoidable for the transition

The project business has the great advantage that sales expenses are relatively small. Above all, they can (but should not) be unstructured. The huge demand of the last few years for Internet-enabled software has meant that it is usually enough to be well connected and to deliver decent quality. Then, as a company, you usually have enough work.

In the product business model, quality is also enormously important, but a good network is enough to win the necessary number of customers. Rather, an offering has to be created that stands out from the competition and which must also be communicated accordingly. This requires relatively high expenses in marketing and business development. Above all, one must also have the necessary expertise in the company.

Therefore, one can simply not continue to be a purely developer-driven company. Rather, one must, to a large extent, grow into a company, which must also deal with very commercial topics.

Industry experience is critical to success

I’ve come across a few companies that started out on the greenfield with a new product, without having had any previous in the industry. All these attempts went wrong and the companies had to return to the project business.

Since then, I strongly believe that one must have extensive experience in the industry in which one intends to launch a software product. This sounds obvious. However, it is not so clear in the implementation.

For example, if a software company has already carried out many projects in the mechanical engineering industry, it is generally able to recognize where the challenges and problems lie. If new software solutions can be realized around these challenges and problems, which do not yet exist in the market, chances are that the product will be successful. It serves, so to speak, a natural need – from people who have acquired a high skill level within a vertical market.

TAM, SAM, SOM – Where does cultural change begin?

Typically, the level of market assessment carried out when evaluating new software products is too low. Market evaluations are often too optimistic. In addition, the skills needed for market estimation and rudimentary market research are often lacking (Desk Research - see also TAM, SAM, SOM). This is especially tragic, because time and money are invested in something that simply has no basis.

The most important change in my opinion, however, comes from the general cultural change that accompanies the shift to a product-oriented business model. Whereas, in the case of projects, the customer specifies roadmap, timing and cost frameworks, or at least significantly contributes to them, developers are usually on their own when creating a new product. I have often observed that this leads to priorities not being optimally set. For example, the perfection of a more technical feature is quite popular, without checking whether the so intensified feature also offers adequate business value.

Overall, I think the transition from a project-driven business to a product-oriented one is very difficult. In general, it is successful when a company has different skills and areas of expertise, mainly in the areas of development, marketing and sales.