App Economy & Business Model
The app economy has only been around for a little more than 10 years. In that time we have seen an explosive growth and the number of people who can make a living from developing and selling software. It used to be the case that the only way to make money as a software developer was to work for a large company. But, times have changed with the release of the App Store and the entire industry that was built up around it.
While the app economy is a subset of the software economy, there are several significant differences between traditional software and mobile apps. We will start this section by reviewing the traditional software sales industry, then quickly shift gears and move into the app economy structure and monetization.
After a brief overview of the players and the history of the app economy, we will jump into the different values streams that exist today.
Finally, we will talk about where the money flows and how you can make more of it flow to you. As a bonus, we will talk about the less known sub market of buying and selling mobile apps.
The following outline will be use to guide our work in this section:
The Software Sales Industry
The Players and History of the App Economy
Where The Money Flows
Where’s My Money?
Just like Regular Business?
Leveraging your Position for Massive Wins
The Software Sales Industry
Software sales is probably one of the most profitable professions in the world. By profitable I don’t mean highest revenue. I mean the money left over after you have covered all of your costs for creating a product and paying the people who built it.
Consider the difference between the cost of building loaf loaf of bread for a customer and building a piece of software for a customer. (It almost sounds silly to say the words “build a piece of software”.)
It is generally understood that to make a loaf of bread you need water, flour, and salt. You also need a mixer to combine these ingredients together into dough. Then, you need a baking pan to put the dough in. After that you need an oven that can heat the dough until it becomes bread. After that you can place the bread in packaging that is then shipped to the customer.
This process must be done for every loaf of bread and every customer who receives it.
If only bread was more like software.
To build software, your inputs are quite different. While software does require many lines of code, sometimes millions of lines of code for more complex software, these lines of code or not consumed. Rather, these lines of code might have it existed before your project. And absolutely can be used again after your project. So, right away we see the biggest difference between a physical product and a software product: the inputs come from re-usable sources and those reusable sources once using the project can then be reused again for subsequent projects.
Good luck using flour from a loaf of bread that you already sold to your customer.
After all of the lines of code written written for your software you then compile it all into an executable format. This executable format can run as a self-contained application on your customers device.
This process only needs to be completed once. Every subsequent customer can benefit from the exact same deliverable you gave to the first customer.
That means your product cost Per unit drops to zero immediately after you finish building the product. Of course, there will always be enhancements or corrections that need to happen to the software. But, that is no different than the additional costs related to burning bread or receiving returns from unhappy customers.
Measuring the cost of doing business, especially your product cost, there’s nothing more profitable than software.
Next, we will talk about the different ways that software is sold. It’s important to point out that because there is no unit cost for software, the pricing structures and the sales models tend to get creative and sometimes confusing. So, if at any point during the next sections your head starts to hurt, put this down and go outside for a walk and some fresh air.
One Time Purchase – The Perpetual License
Perhaps this is a good place toTalk about the legal nature of software. Software is protected under copyright law. And just like any other intellectual property, the owner of the intellectual property is able to grant a license to that technology while retaining ownership for themselves. Retaining ownership allows the owner to sell additional licenses to other individuals.
Extending the bread example, you wouldn’t be able to sell a loaf of bread to one person and then sell that same loaf of bread to another person. That either violates the laws of physics, or causes some serious tension in your bakery.
As you probably gathered, for something to be licensed, it needs to not be confined to a single physical embodiment. In other words, it needs to be intangible. But, not so intangible that it is merely an idea. The idea, needs to be embodied in some sort of fixed form. They fix form can consist of several different types of media. Text is a fixed form, video is a fixed form, images or a fixed form, and computer software is a fixed form. Although, computer software is text and is often categorized as such for the purposes of copyright law.
So now we have an intangible asset that we can duplicate as many times as we want. That right to duplicate this intangible asset is reserved exclusively to the owner. However, the owner is able to sell all of his rights to another individual, or grant a license to some or all of his rights to another individual.
In the case of software, it is nearly always the case that a customer is paying the developer for a license to the software. You might recognize this as the end user license agreement that we all agree toafter we have installed software that we are going to use.
These end-user license agreements outlined what we canning cannot do with the software. These restrictions are put in place because as users of software legally speaking, we do not have all of the same rise that the owner of the software has. For example, we do not have the right to copy, distribute, create derivatives, or offer for sale. To name a few.
Now, what does this have to do with one time purchases of software? Or, as I mentioned in the title, perpetual license? Well, everything.
Because you don’t own any of the software that you have paid for, you can’t decide on your own what you are able to do with that software, or how long you have the right to access it.(Time based licenses are discussed below)
The one time purchase, or a perpetual license, is a type of software license that allows you the user to continue to use the software as long as it’s useful life. The specific language used in each license agreement may vary, but the concept is the same. You can use the software, without paying any additional money, until the software stops working. Sometimes, and hopefully most of the time, there are additional terms about how many updates and upgrades you are eligible for as part of the license that you purchased.
So, you might be asking yourself what the differences between owning software out right and having a perpetual license granted to you for software. Well, the biggest difference is that ownership gives you all of the rights to do anything and everything you want. The license only gives you the right to do what is listed in the license.
(In a section below we discuss at length how the perpetual license model has been used in the app economy.)
Support & Maintenance
Support and maintenance is a funny little necessity that can eventually add up to be a large financial opportunity (or obligation depending on what side of the sales you were on).
Because new software is 100% free of bugs, there needs to be a way to receive fixes when defects are discovered. It would be reasonable to assume that bugs that are discovered and softer than you already paid for should be covered under your original payment. However, this is not always the case. In fact, it’s more often the case that you will pay an extra fee to get the support and maintenance that are necessary for your continued use of the softer for you purchased.
At the enterprise level, the typical support and maintenance fee is 15% of the original license fee paid annually. So, if you purchased a perpetual license for $100, you would need to pay anywhere between $15 and $30 each year to receive the support and maintenance that software requires to stay operational.
If you Are lucky enough to have a license agreement that also includes updates and upgrades, that $15-$30 a year might seem worth it. Especially if an entirely new version of software is released and your annual fee automatically grant you access to it.
Updates & Upgrades
Updates and upgrades are typically provided as part of a support and maintenance offering. However, that is not always the case. Often, software will be sold along with support and maintenance but once the software hits a new point version, you will no longer receive updates. Only bug fixes.
When this happens, you are obligated to pay another license fee if you want access to the new version of software. To throw another wrench in the works, typically software is only supported for a predetermined amount of time after the date of last sale. So, while you might want to continue for many years pain only $15 a year for your software, thinking that you can avoid buying the new point version. Eventually your support will have expired due to time, regardless of how diligently you have paid or have committed to pay into the future.
Term License
Term licenses give the user access to software for a set amount of time. Typically the term license is offered in increments of months or years. Less often, term licenses can be offered for a period of three, six, or nine months.
Just as the name implies, a term license gives you the right to access the software for a specific amount of time. When the term ends, your access rights are terminated. This type of license access can cause serious anxiety for businesses that have come to rely on the software that is licensed. If a new agreement is not reached by the end of the current license term, the users of the software run the risk of losing access and having to shut down whatever business operations relied on those licenses.
Subscriptions
Subscriptions are a type of term license. There aren’t any real difference, unless the licensor decides there is. The difference a really wrest on whether or not the user will receive updates and upgrades. Under the subscription model, this is typically the case. As long as you continue to pay your subscription fee, you will receive the latest version of whatever is offered from the developer.
Alternatively, a Term License could either follow this same subscription model, or it could adopt a term model that is not only time-based, but version based as well. A term license that is locked into a time-period as well as a version it possibly the worst kind of license you could get yourself into. Effectively, a Term License with time and version cliffs mean you must continue to pay for access, even after the version of software you have is no longer the current release. Not ideal.
Subscriptions are also different than Term Licenses in the public perception of what is included with a subscription. The word Subscription denotes some sort of recurring distribution of content – like a magazine or TV Series.
It would be nice if software developers would treat their software subscription offers the same way a magazine publisher treats their subscription, we’d all be in software heaven! But, unfortunately, that’s not how the software world world. Software subscriptions are nothing more than Term Licenses hiding behind a feel-good word that quickly dissolves the moment you take a closer look.
2- The Players and History of the App Economy
The First Software Company
- What did Software Do
- The Web Apps Confusion
- iPhone, and Real Apps
- The One-Time Purchase Problem
- Subscriptions to the Rescue
3 – Where The Money Flows
Developers Need Software Too
Entrepreneurs and the Pay to Play Platform Fees ($99 Apple Developer Account)
The Commission on all the Money
Subscriptions, and Loopholes
Exception: “Reader Apps”
4 – Where’s My Money?
Payment for App Development
Pay for Access to App Platforms
Income: 70% of Sales on App Store
Income: 100% of Sales from non-digital Goods & Services
5 – Just like Regular Business?
Selling Your Product
Selling The Product
The Wacky World of Software Profit Margins
Cost of Ongoing Operations
Buying and Selling Apps For Fun and Profit
6 – Leveraging your Position for Massive Wins
Know your Monetization structure and OWN it!
Do the basics first, scale second then get creative
Be ok with gradual growth
Know when your growth needs a boost or a pivot