Each software development company gets income in different ways. There are companies that develop software for each client individually and their income is the calculated development cost, which includes a large number of factors: the complexity of the project, what specialists were involved, the number of work hours, whether freelance specialists were involved or not, etc. There are companies that develop "tight" specialized software, for example, PMS software for the hospitality industry - https://www.bookingninjas.com/, and sell it at a certain cost to the relevant companies that need it. The option of monthly, annual, or some other subscription can also be used. In addition, many companies add advertisements to their applications (especially often seen in applications for mobile phones). Therefore, this issue is quite complex and extensive. It all depends on many factors.
Ask HN: How do custom software dev firms make money?
21–30 of 111 posts
Re: Ask HN: How do custom software dev firms make money?
#22I tweeted a thread that can be useful on how to deal with enterprise for custom products in the mid six figures ball park that one or two motivated individuals can pull off, contracts, exclusivity, product development, and abstraction[0]. Feel free to ask for more clarifications.
- [0]: https://twitter.com/jugurthahadjar/status/131066829330549965...
Re: Ask HN: How do custom software dev firms make money?
#23I'll add one more that I have run across. It's a revenue/savings share agreement, where the company writing the software gets an X% of the revenue (or savings) generated by the project.
I’ve seen equity as part of the compensation deal, but never revenue sharing.
Depends on how bit the firm is. Very large consultancies with good lawyers who can commit to long-term support can do this and I have seen it. For example, one consultancy I was at charged "several pennies per billing statement" in exchange for re-doing the billing and statement system for a large telco. The consultancy also got a fixed fee upfront for initial investment.
This is sort of revenue sharing -- more customers, more statements (though not more services per same customer) means more billings
Re: Ask HN: How do custom software dev firms make money?
#24[deleted]
Re: Ask HN: How do custom software dev firms make money?
#25To add to other answers, often a business or non-profit will put out a request for proposals (RFP). You read a document or have a meeting to understand what they are trying to accomplish. You then write up a proposal with a budget. They read all the proposals and choose a dev firm to work with.
Re: Ask HN: How do custom software dev firms make money?
#26Earlier quoted context omitted.
That's an agency-friendly type of contract and it's really, really hard to sell that way unless you have a sterling reputation and great rapport. Most clients want to know exactly what they're getting and how much it will cost. Experienced tech leaders know estimates are estimates and clients usually can't even articulate what they need clearly enough anyway. It's why client services people get paid so much and why i…
I had projects like this. We define the whole project with the client first and agree on overall price. I then split it into few stages and upon completion of each stage I would sit with the client show the work and client signs off the stage as done and pays for said stage. With this type of work I would also always charge non refundable initial deposit as sometimes the client will have the contractor started and th…
That’s really interesting. I’m coming at this from 2 angles —- I run a small “shop”, me and 1 or 2 other guys part time; I also work for a company who has contracted an agency for creating a design system for us.
Do you estimate there will be X hours of bug fixing and add that to the price of billable hours?
How do you take into account client requests after a billing period is complete or during a billing period?
IME US agencies wind up billing over $100/hr/dev then still charge for bug fixes.
I’ve learned over the years that I cannot give a per project price and it has to be hourly as requirements shift often or certain tasks run over
Re: Ask HN: How do custom software dev firms make money?
#271) Clients come to you because they have a painpoint and they wand to build something to help it. 2) You discuss with the clients what's their needs. 3) Figure out what you can do and agree with the client on the billing/project. (how many people? of what skills? how long? what to build? for how much?) 4) Do the work. Projects could be anywhere from weeks to years. 5) Long time goes bye. 6) Done. There's two ways to…
There is also value-based billing. A lot of people talk about it, but never seen in the wild.
EG A business has a manual process that costs them £2m/year to run. Instead of calculating how long it would take you fix, you price based on what it is worth to the business to fix the issue (obviously this needs to be larger than what you would charge on a time and materials basis).
Brennan Dunn was a big advocate of this, but mainly on a small consultancy scale (https://doubleyourfreelancing.com/rate/).
Re: Ask HN: How do custom software dev firms make money?
#28There are two common cost structures: estimated time and fixed bid. Fixed bid is relatively simple: company says project will cost X dollars, and takes on the risk of that amount ending up being too low. As a consequence, these projects tend to be very rigid; if a client wants any changes made to the plan or outcome, typically that involves another charge (unless certain revisions were allowed for up front). Estimate…
Normally on a fixed bid project, the consultancy hopes for change requests. That is where they make a lot of their margin.
At that stage, you have the client company over a bit of a barrel. Unless they want to throw the consultancy out and start the bid process again.
Re: Ask HN: How do custom software dev firms make money?
#29> the revenue model of custom software dev firms
Taking a cut of the economics of the transaction, just like giant software firms do.
For example, the seller is an HBS grad whose buddy is a PM at Microsoft with permission to pay vendors - the buyer. Seller can't program but he can find young people who can. He knows there's a $400k budget for a Sharepoint search plugin, he pays 3x young people $66k each, pays out $50k in one time deal expenses (legal, kickbacks i.e. "illegal"), and is left with about $150k in profit on that deal. Some of that profit is used to pay back losses on previous projects, so net that year, a $400k project may make about $80k (i.e. 20%) for the seller personally.
Net-of-50, maintenance, etc. - these are just narratives developed for the buyer's processes, to close the sale. You're in school, you should know that the way people come up with names for revenue is a narrative for investors and accountants, it's not a way to talk about economics (models). In this case the buyer has a lot of checkboxes and this shouldn't be conflated with a "model."
Anyway, doesn't scale and that's why custom software dev firms are rarely big.
When you look at stuff that does scale, like Pivotal or Accenture, there's something fishy with their economics. Or it's Red Hat, and they're actually not customizing much at all!
Re: Ask HN: How do custom software dev firms make money?
#30I did this for 13 years. The basics are covered well in this thread already, so I'll just add a couple of points.
The phrases we always used for contracts were "time and materials" versus "fixed price".
We wanted time and materials, which means the client pays us a set rate for each unit of time we work (could be hours, days, sometimes months) plus the cost of any materials we need to do the job (software or SaaS licenses, assets, or special hardware we need for that job). This is a great model for the contractor, but riskier for the client.
Clients always wanted a fixed price. That's when you guess up front how much the whole project will cost. This is obviously riskier for the contractor.
In reality, most contracts we used were kind of a mixture of these. We broke it into sprints, and billed T&M within those sprints. If the client was unhappy with what they were paying for, they had the opportunity every week or two to pull the plug.
The other point I want to bring up is that there's kind of a systematic flaw in how most custom software dev firms make money. I saw the exact same process ruin two different firms.
Let's say you run a custom software dev shop. Every month, you need enough billable hours to pay them, so you find contracts for them to work on. And, at the end of each contract, you need to find the next contract. The problem is that not all your contracts end at the same time, so, you've always got a rotating assortment of employees sitting around waiting for the next project.
Naturally, you've got a pipeline of new contracts, and something always comes up. The problem is, it's almost impossible to consistently find contracts that perfectly match the exact group of people you happen to have sitting around waiting for work.
What most firms do in this situation is hire more people so they can take the contract, which increases their payroll, and requires them to look for an even bigger contract next time. The business model now becomes a riskier and riskier series of bets, as the business balloons.
Meanwhile the quality of employees is dropping, because you just need butts in seats at a faster and faster rate. Your ability to succeed on contracts is put at risk, not to mention your company culture and morale.
Eventually, you either lose a client due to incompetence, or you can't find a big enough contract to meet your expanded monthly nut, and the whole thing topples over.
After living this for over a decade, I came around to the position that custom dev shops can't exist forever. They're unstable systems that will all eventually break apart into smaller custom dev shops, which then recapitulate the same unstable cycle.