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On the commoditization of software


#1

In the most recent episode, @ian said that he suspects that software, in general, is being commoditized down to, essentially, being free.

This has clearly been happening in the mobile market for years now, in a sort of accelerated form, with customer screaming at the outrageous greed of a developer who dares to charge a dollar for a piece of software that took the better part of the year to write

I’m not sure I like the alternative strategies of ads and in-app-payments as a way to circumvent the situtation; it feels more like a gap-filler than a sound long-term strategy, and makes products almost feel like platforms for artificial revenue generation rather than something that has a value in and of itself.

But Ian wasn’t talking about the mobile market per-se. There’s been evidence that the software market in general, especially, in the B2C space, is trending towards free. Apple, with their recent announcement that many of their core packages, including the OS, will be offered for free, is propagating the (rather toxic) notion that software is just there to help sell hardware. It’s almost a hark back to the software market of the mid-80s.

We didn’t get the chance to explore this on the show, but I’d love to hear your thoughts on it. Are you starting to feel a trend toward the commodization of software? As a consumer? As a founder of a software company? Are you seeing this in B2B markets as well as B2C? Have you made any significant strategic or tactical decisions on how you do business or price your product? Or are you simply choosing to ignore this, and hope it’s a passing fad.


#2

I’ve done some thinking on this. And I keep coming back to the value. If the software provides enough value, it’s worth the money. And often-times, that value is not just the software itself, but the company behind it. ie Warm fuzzy feelings about that company, future feature update potential, great support, etc. Otherwise, we’d all be running Linux and everything we use would be open source, or the software would be free and we’d be paying for a service of some sort, like support.

There are lots of things with cheap or free alternatives, but the pay for stuff still has value, and people are still buying it.

So I don’t go along with this thinking. And to @Ian, I’m surprised that Snappy is only $20 per user, I seem to think the price should go up, not down. That’s crazy cheap for the value. And I say that as hopefully a future customer when I my biz off the ground, heh

Reading back through this, I suppose through most of it I’m thinking B2B. B2C, I’m more in line with this thinking. Everything in B2C will be in an app store of some sort. And the app stores seem to be what are commoditizing everything.


#3

As a consumer, sure, there’s a lot of free shitty software out there that doesn’t really solve any problems for me. In fact, as a consumer: I don’t really have that many problems that are really worth solving.

Don’t sell B2C software?

I think this probably will impact B2B as well, though. Fundamentally, software does cost less to make then it used to. The tools and libs you can get now are much, much better then they used to be, and mostly they’re free. Plus, there’s a whole lot of best practice to draw on (be it dev, bus, marketing). Writing software these days involves a whole lot less effort because mostly its gluing other peoples work together, you make less mistakes because you’re following dev best practices (right?), and your kicking business goals because you read HN.

So for the same result, we do less work, and so we charge less… unless we can collectively agree to charge on value… but keep it on the down low because otherwise we’ll get done for collusion.


#4

B2B has seen less of the downward pricing pressure because it is usually bought with Other People’s Money, so there is less worrying about the price. Even when the price is discounted, money is recouped with maintenance and support contracts.

B2C has a tougher time of it because most individuals are careful with their own money (a loss is felt more keenly than a gain). The economy has been pretty bad for most folks for years and years. Developers are also falling victim to the extreme opinion echo chamber that is the internet and being convinced to sell their products for less than they are worth.

My (so far untested) thinking for selling B2C software for a price is that you need to position it as an affordable luxury, just like many companies do with their products. Make the software measurably different in some way, and market it as not being for everyone, just for those who like and appreciate what is special about it. That’s what I’m planning to do with my Chinese app. Something along the lines of ‘you can learn Chinese without it, but it does this cool stuff no other app does which may help you, so why not treat yourself?’


#5

We’re in a bit of a funny space with Perch because although we are B2B, a lot of our customers are freelancers and very small web design agencies who often act a bit more like consumers - they are spending their own money. Even though this is a product they should be able to charge to their end client. So we see this from both ends.

Our true B2B type customers absolutely see the value in paying for software, in fact will sometimes tell us we charge too little and that they can’t understand what problem anyone could have in paying for the software. These customers aren’t just bigger agencies, many of them are essentially freelancers but they have made that jump from seeing any expense as being out of their pocket to seeing the expense as a cost of doing business, that can ultimately improve their business and make them more money.

Then we have the other group who for various reasons see the expense - even when it is being used for a client site - as being out of their profit. In this group are folk who will spend days trying to force a free bit of software to do something that Perch would have done in minutes as they put less value on their time, but also new freelancers who are just scared to spend any money (been there myself so can sympathize). This group are far more likely to complain about price and jump on any possible discount.

Common sense would dictate we should ignore group B and focus our efforts on group A, however we find we can often help group A people become group B people, which isn’t only good for us - it’s good for them as they are then starting to run a more profitable business. One of the things I really love about what we do with Perch is we have a whole batch of customers who tell us that they now are offering a load of extra services to their clients that they couldn’t before.

We’ve started a bit of an experiment by offering a special deal to get a copy of Perch at half price for use on your own agency or portfolio site. The idea being if people try it out and love it, they see the value in paying for it. As predicted most of the people jumping on this offer are smaller agencies and freelancers - the typical site they are going to use it on is a domain name with their name in it indicating usually a freelancer site. It’s too early to see how many of those people then start to use it for clients but we thought it an interesting thing to do as actually trying the product in the first place is the biggest barrier to entry for this group of customers. I’ll report back once we have some data to share on that.


#6

A note on that last paragraph. When I built sites on ExpressionEngine, they had this exact model. A full license was $300, but for something much cheaper, I could get a license for my freelance site.

In the beginning, this was the difference between using it and not using it, when I had more time than money, as you say. Gave me a feel for the software, and when it came time to use it for a client site, I felt comfortable with it and that I could quickly build something on top of it.


#7

The book ‘Free’ ( http://www.amazon.co.uk/Free-smartest-businesses-something-nothing/dp/190521149X ) argues that the natural end point is for all software to be given away free in order to sell physical stuff. This is partly based on the economic principal that the price of commodities tend over time to fall to their marginal cost of production. Which is 0 for software (if you don’t include support). Let’s hope he’s wrong.

I think Apple is playing a dangerous game. If they completely devalue Mac and iOS software, then their developers are likely to defect for greener pastures.


#8

I should have wrote a book about this!

Perch is a good example of all of this actually. 20 years ago CMSs where tens of thousands/millions of dollars, 10 years ago they were thousands of dollars, 5 years ago hundreds of dollars, today a great CMS like Perch is $79 and many well regarded alternatives are completely free.

So we’re all going to end up having to make money around the edges. Hosting (how horrible is that, though SaaS is a form of hosting), support, add on services/customization, etc. I don’t think that day is here yet and a small shop can last a long time even on lower priced products but it’s still a bit depressing.


#9

I’m not so sure. When CMSs were tens of thousands of dollars, regular folk just didn’t use a CMS. They wrote HTML and FTPd it to a server. The fact that almost every site has some kind of CMS behind it now is probably due to all the free things creating that market.

Now everyone expects a CMS, and people are realising that sometimes it is better to pay for something that has support and is going to stick around. I’ve seen people become happier to pay for software like Perch in the last couple of years.


#10

The examples mentioned in the discussion: CMS’s, electronic customer support systems, Unix based OS’s, and the productivity apps Apple and others give away: basic office apps, calendar, todo-list, note taking app, email client, etc., are all versions of software products that have been on the market for 20+ years.

Given a competitive market, every product idea will eventually be marginalised (if there are people who wants to use the product). Todays high profit products are based on new ideas and catering to small niches. In 20 years, todays high margin products will likely have been marginalised.


#11

I think it does come down to niches. Can you find your way into a group that values better support, values the different way you approach the problem vs the mass-market solutions, etc. But with so many cheap/free options it does make the hurdle higher as now you have to reach farther to find enough people willing to pay and that’s often challenging for bootstrappers who can’t artificially create reach via advertising.

On the upside, the inexpensive nature of creating software now means don’t need to sell a ton of it as your expenses are minimal.


#12

Smaller shops are generally seeing the squeeze of this, especially if their products are sold as individual licenses. The ExpressionEngine community is amazing and really supportive (through dollars) of great commercial add-ons.

However the pattern I’ve noticed is that in that particular niche, the expectation from the consumer is once they buy an add-on, they get free support & updates for life (because that’s how EllisLab used to work and ever add-on dev followed their example).

To me, that’s a slower and deadlier form of commoditization, because while you’re attracting new customers everything looks good, until your sales flatline and your costs skyrocket. In a small niche, you hit that barrier sooner than you think.

I think Thomas Griffin has a good solution to this: http://thomasgriffin.io/making-amends-for-business-decisions/. Yearly subscription model w/ support & updates included (of course you need to actually have great support & regular updates), customers opt in every year if they want the latest & greatest.

The real difficulty is getting customers used to the idea if they’re already on the “support & updates for life because I spent $20 once” model.


#13

I’ve been reading “Pricing With Confidence” (http://www.amazon.com/Pricing-Confidence-Leaving-Money-Table/dp/0470197579), and while the style and content of the book is way too enterprisy high-touch sales for my tastes, the core concept is pretty powerful.

That is you can always price on value. Always. (And you should)

Event in a market that get’s commoditized, you can price by value. A great example is the vacuum tubes used in amplifiers. We’ve since invented much better, cheaper technology, but smart vendors have raised prices in a mature market by targeting audophiles for high end audio systems.

With software, what are you selling? If you’re selling slick designs and clean code, then yeah, you’re going to get commoditized. If you’re providing value in a person’s life (even if that value is just perceived value fabricated by good marketing – think luxery car brands) then you can charge whatever you want.

IBM had to do it in the early 90’s. They could no longer support themselves selling hardware and software. They had to start selling a full product ‘solution’ (as much as I hate that word). They even came up with a stupid marketing name for it – eBusiness.

I recently heard a story about a 4th generation store that sold pens and stationary. Totally commoditized and going out of business, right? Not so fast. The youngest son has retrofitted the business to sell high end writing tools, created a great e-commerce business, and crafted an incredible in-store experience along side it. You can bet he is not competing on price.

I think a big villain in this story is venture capital. They demand growth from portfolio companies that simply cannot be achieved by selling things to consumers. Young entrepreneurs are expected to hit massive growth numbers, and, often, the only way to do this is by giving software away. Bootstrappers need to fight that by accepting slower growth for a more sustainable future, and have confidence in our pricing.


#14

Pricing With Confidence is a great book, and I agree. It’s up to us, the product creators, if we go along with the price war or if we price on value. Software, as product, is not a commodity by its nature. It’s not like cotton or raw oil, where you can change supplier on the fly.

And as we speak, probably yet another free product dies somewhere. And people who want continuity to their businesses and value their time - they don’t want free products. In MicroConf Europe Peldi told in his talk that their company doesn’t use any free software. They want products that stay alive.

How many people spent tens, maybe hundreds of hours putting their photos to Everpix? All that work is lost now.

Of course, businesses that charge may die too. Just maybe not as often.


#15

I’m not sure I agree that software suppliers can’t be switched out. In many cases switching is extremely easy. Everpix is a great example. Their uploader uploaded all my photos. Now I can switch to Picturelife or Flickr or SmugMug all of which have uploaders that will move my files. While I don’t like it, changing actually isn’t that hard.

The products we make are probably on the farther end of software lock in (help desks often require training, other systems are built to their API’s, etc) and even there we see a fair amount of movement. There are also several services that will move your data between services. They’re not perfect, yet. But they’re getting better.

It’s not a pure commodity, but every day it marches closer.


#16

Having a discussion on Twitter about Snappy’s price vs Zendesk’s $20/yr 3 user plan. Thought it was relevant to this thread…


#17

Hi Andy, the cost of production for software is not zero and it will never be. It might aproach zero when we’ll have AI capable of writting it’s own software.


#18

The marginal cost is the cost to sell one additional unit (i.e. not including development cost). The marginal cost for software is 0 or very close to 0, if you don’t include support.


#19

If you’re thinking in terms of classic desktop software you’re right, but i think we’re way past that point.


#20

The marginal cost to add another user to a SAAS app is also pretty close to 0, isn’t it?