Monday, August 1, 2011

What makes wireless software companies profitable

Throughout my career, I have often been in situation to transition companies from custom development to product to solutions. We have discussed here what influences most the penetration of a new technology in the ecosystem. Along the road, I have noted a few numbers that seemed to make the difference between the companies that reached a profitable stage from those who did not. I will focus here particularly on product development and product line management

Below are a few of these numbers. I have researched over time many of those. I won't bore you with the maths or the academics, here are just my magic numbers.

Golden operating numbers for profitable wireless software business:
  • Gross margin >60%
  • License 70%
  • Maintenance and support 12%
  • Professional services 8%
  • Hardware / third party 10%
Many companies (all?) have to choose between short term, tactical opportunities, which might not be contributing greatly to the company's overall strategic direction but can influence the results of the quarter, and long term investments such as launching a new product which will cost money but not see an immediate result. Here is how I have been measuring whether my projects can meet the above profitability objectives.

Change requests, custom development
  • Roadmap acceleration 50% margin
  • Regular change request (could be resold but would not develop it if it were not paid for) 66% margin
  • Customization that cannot be resold 75%
  • Customization on old product branch, new product branch 80% and up
  • There is no such thing as "we'll make money on the next ones" or "lets spread the cost across several opportunities" . A custom work needs to be profitable on is own.
Business case, new product introduction

  • break even (development costs) within 12 months of the first selling month (GA)
  • 3 times development costs recovered in sales within 24 months 

These numbers do not guarantee profitability but I have found that not using them guarantees losses :-).

I am not sure these will be useful to you but I found them good guidelines throughout my career.

PS: Don't forget Hofstadter's Law: "It always takes longer than you expect, even when you take into account Hofstadter's Law"

1 comment:

shutkov.mihail said...

Very interesting, especially Hofstadter's Law... =)
But I want to note that the figures vary greatly depending on the market.