I had planned to do these business/strategy posts at least weekly, but its been a month since the last one!  We’ve been unbelievably busy in 2012 — much more so than I ever expected, which accounts for the delay.  But I do plan on picking up the pace whenever I get a break.

Lets talk a little bit about basing a business on software.

Too often, the software industry is painted by the media as some special class of business where the usual rules don’t apply.  We read stories every day about a guy living in his parents basement who creates a little game that goes on to make millions, or a kid in a dorm room who creates a website and later sells it for a billion dollars.  In fact, these sorts of stories completely dominate the headlines when it comes to tech business reporting.  Its understandable that misconceptions abound about making money in software.  Let’s tear a few of those misconceptions apart, shall we?

When many people hear story after story about the overnight successes of software developers, it creates the following misconceptions (which we hear about all the time!):

1. Software doesn’t cost anything to make (after all, that guy was living with his mom!)
2. You only need one product to succeed (after all, that was his first website!)
3. Software markets itself (after all, he had no marketing budget! Also, VIRAL VIRAL VIRAL!!!)

Lets look at these in more detail.

Software doesn’t cost anything to make

This is possibly the biggest misconception of all.  The truth is, software costs a lot to make.

The going rate for a freelance mobile software developer right now is somewhere between $150 and $250 an hour, depending on his/her experience.  And even a the simplest app, with a respectable amount of polish, is going to take a couple weeks to produce — let’s say 40-80 hours at a minimum.  That’s between $6000 and $20,000 just for the simplest of apps.  Start adding social features, a backend architecture, design, and so on and the cost goes up.

To give you a more realistic idea of cost, a well made app with a respectable feature set, a good deal of polish, and enough complexity to impress the market is going to take at least a month to build.  160 hours is a good average for anything other than a restaurant menu or an app that plays fart sounds.  Now you’re looking at a cost in the tens of thousands of dollars, just for code.  Design, art, marketing… these things drive the cost up even further.

Is your app a game?  Then we’re looking at an even higher cost.  Finding a good app developer is tough enough, but games are a special breed of app, and they require a special breed of developer if you want them to be done right.  I am planning on doing a post in the future on the complexities of game development, but for now let’s just say that getting a game right is tougher than anything else in software.  As a result, a good game developer will cost more than a good app developer.  In addition, you are now adding costs for music, sound design, lots and lots of artwork, possibly 3d models.  Games are big, big projects.  Even simple games.

And that’s just for the first release.  In the new world, software must be constantly updated, and each of those updates costs money.  Generally, an update costs a fraction of the first release, but if you are updating your software frequently, eventually the cost of the updates can totally overshadow the cost of initial development.

Lets look at an example everyone knows: Angry Birds.  From what I understand, the first version of Angry Birds cost around 100,000 euros to build.  In today’s money, that’s about $132,000 US.  Sounds like a lot, but its even more than it sounds.  Keep in mind, Angry Birds was made in Finland by full time employees.  I don’t know what the average Finnish game developer earns, but I do know that a well paid, full time developer in the US earns anywhere from $30-$50 an hour.  That’s significantly less than the $150-$250 a freelancer earns.

Its also important to understand that technologically, Angry Birds is a dead simple game.

The lesson to learn from Angry Birds is that a good game costs money to make. Lots of money.

You only need one product to succeed

The most important thing to remember is that overnight success stories are not as common as they seem.  For every developer that got really, really lucky there are thousands who completely flopped.

Another really important thing to remember is that reports of overnight success are usually grossly exaggerated.  As Monty Hall said, it takes 20 years to become an overnight success.

Case in point: Angry Birds was not Rovio’s first game.  Rovio has actually been around since 2003.  A more recent example is Imangi Studios.  Click that link there and look at how many games they’ve released.  Right now they are glowing in the success of Temple Run (a truly fantastic game, by the way) but they made many, many games leading up to it.  They learned from each one what worked, what didn’t.  They learned where to put the money, how to market effectively, how to properly price the app (Temple Run was initially a paid app, now free with IAP), and so on.

Imangi is a fantastic example of a small game studio building a business.  There are only three of them, and yet they turn out games like crazy, learn from their mistakes, improve, and succeed more and more with each release.

Remember if you enter this market to have a long term strategy.  Your first product should always be seen as your first product.  Expect to make more, expect to use old products to market new products, and expect to gradually build a reputation.  That’s the easiest way to succeed in a crowded market.  You positively cannot stand out in the crowd by just tossing a piece of software into the ocean.  Remember, that’s what everyone else is doing — thousands and thousands of other software developers.

Software markets itself

This is an entire blog post unto itself, and I will make that post in the future.  But the key points are:

• No, software does not market itself — even social software.  Do not rely on anything you build to “go viral”.  It rarely happens, and when it does, it isn’t because you made it happen.  It just happens.
• Do not rely on the app store to sell your software for you.  Apple does not help at all.  Being on the app store is relatively worthless for marketing, because there are half a million apps on the app store.  You are one of a ridiculous number of people competing for the same pool of money.
• Marketing costs money. And it requires strategy.  Whether that means spending a lot of money to market a single app, or spending money to build several apps in order to build a brand, or a name for your company, it is going to cost money.

The absolute shortest way I can sum all of this up is to simply say this: the software business is just like any other business.  You can’t build a successful restaurant by just opening a cheap hamburger stand in the middle of town, and you can’t make a killing on your game by making it cheap and just tossing it out into the sea.