Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Ask HN: How do custom software dev firms make money?

news.ycombinator.com

Post reply on HN
Print view View original

71–80 of 111 posts

Re: Ask HN: How do custom software dev firms make money?

#71

Post by ozim »

karaterobot wrote: post #30

I 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 lic…

If you would have a SaaS product idea then you could invest in a product that will bring stable income. That is the way back to sanity so instead of going into that madness of chasing bigger contracts you invest time of employees that are on bench into building your own SaaS.

Then you keep one of employees, later maybe more, on that SaaS and slowly change your revenue mix. Then you still might get some additional projects but you always have something to spend your FTE time on. In the end you change the company profile where you chase different things than just having butts in the seats.

But that might mean you are not getting any salary for months because you have to reinvest in your SaaS idea. Of course having a viable product idea is another very important point.

Upside on the other hand is that selling viable SaaS business will be easier than selling dev shop, because dev shop only has developers. When developers quit dev shop value goes immediately to 0, with SaaS you still might have IP and paying customers.

Re: Ask HN: How do custom software dev firms make money?

#72

Post by mipmap04 »

edanm wrote: post #67
gharman wrote: post #32

I founded, grew, and sold a boutique software services co. Here's the skinny: * The core revenue model is charge customers a certain amount for doing work, and to have a lower internal cost. (duh) * Typically you're looking for a 30% margin or thereabouts; after cost of sales, consultant bench time (yeah you gotta pay that even when folks are idle, if they're employees), etc. you have maybe a 10% profit margin when y…

I also founded, grew and sold a boutique software services co., and am now running a new one. I agree with all of the above. The only major note I'd add is: some of the above really depends on who your clients are. For example, we work with mostly technical customers, taking on things that are not their core strength. But only customers who already have internal dev teams. The way we phrase is internally is "we want…

I've started doing this as well too. I don't want to be someone's hosting provider or CSP. Too many headaches and building the thing is a lot more fun than watching it run and making sure you've in compliance with the 1000 governance documents the company has regarding production environments. There are a lot of good companies that already provide purely that service and, to your point, many companies have those teams already.

Re: Ask HN: How do custom software dev firms make money?

#73

Post by ctvo »

chairmanwow1 wrote: post #37

>> “Hey HN, I'm working on a project for school and need to learn a bit more about the revenue model of custom software dev firms.” I used this trick A LOT in college to get secrets from companies. My friends and I would call some people and tell them we were trying to understand something for a report. It was amazing how much secret information people were willing to share. One of the most powerful assets you have a…

> It was amazing how much secret information people were willing to share.

Was it secret information or did they spell things out much more clearly for you because there was no assumption that you had prior knowledge? This tends to happen to journalists also, for the same reasons.

See the replies in this thread for examples of people clearly spelling out things step-by-step. It's not secret information. When you take away any assumption of expertise, it may seem that way to someone not involved in the industry.

Re: Ask HN: How do custom software dev firms make money?

#74

Post by aeyes »

HeyLaughingBoy wrote: post #40
gharman wrote: post #32

I founded, grew, and sold a boutique software services co. Here's the skinny: * The core revenue model is charge customers a certain amount for doing work, and to have a lower internal cost. (duh) * Typically you're looking for a 30% margin or thereabouts; after cost of sales, consultant bench time (yeah you gotta pay that even when folks are idle, if they're employees), etc. you have maybe a 10% profit margin when y…

I'm with an engineering services co and we just started getting into Web work: until now we've primarily done embedded systems and mobile apps. How did you typically manage the server/ops end? i.e., do you turn that over to the client and say "here are all the credentials, SaaS licenses and everything you need to run this, good luck" or did you offer Operations & server management as part of your package? It's someth…

For many years I worked at a random big corp software development company. Hosting & Ops is where the big profits rolled in, usually with sweet long term contracts.

I certainly would recommend looking into providing this service. Why would you turn down guaranteed monthly paychecks? Also, you wrote the software so you will be the most competent in operating it.

Re: Ask HN: How do custom software dev firms make money?

#75

Post by zdragnar »

gadders wrote: post #28
zdragnar wrote: post #4

There 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.

Smaller consultancies rely on good relationships for recurring projects and / or referrals, so I haven't seen this behavior as much from them. That said, I do not think it is uncommon for a consultancy to try to make up losses on the original fixed bid with higher margins on changes or future work. It really depends on the people running the show, especially on the sales side of things.

Re: Ask HN: How do custom software dev firms make money?

#76

Post by quickthrower2 »

an_opabinia wrote: post #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 $50…

Ha ha want to see the look on the teachers face when this answer is handed in!

Re: Ask HN: How do custom software dev firms make money?

#77

Post by gharman »

xwdv wrote: post #52
gharman wrote: post #32

I founded, grew, and sold a boutique software services co. Here's the skinny: * The core revenue model is charge customers a certain amount for doing work, and to have a lower internal cost. (duh) * Typically you're looking for a 30% margin or thereabouts; after cost of sales, consultant bench time (yeah you gotta pay that even when folks are idle, if they're employees), etc. you have maybe a 10% profit margin when y…

Is that 10% profit margin per project? What is the yearly profit margin for a software dev firm?

It’s percent of revenue over whatever period of time you care to measure it.

Re: Ask HN: How do custom software dev firms make money?

#78

Post by tootie »

FpUser wrote: post #45
daniellarusso wrote: post #41

Earlier quoted context omitted.

I think it is all in the ‘selling’ of it, it may be a sprint, but it is sold as a ‘milestone’.

I actually meant milestone. I do not do Sprints as in Agile. Normally I design and develop new products from a scratch and there is no use of Agile propaganda in it.

Funny because I do product dev from scratch and wouldn't dream of doing it without agile being explicitly bought into by the client. How you do a non-trivial project setting fixed milestones upfront?

Re: Ask HN: How do custom software dev firms make money?

#79

Post by pmiller2 »

gharman wrote: post #32

I founded, grew, and sold a boutique software services co. Here's the skinny: * The core revenue model is charge customers a certain amount for doing work, and to have a lower internal cost. (duh) * Typically you're looking for a 30% margin or thereabouts; after cost of sales, consultant bench time (yeah you gotta pay that even when folks are idle, if they're employees), etc. you have maybe a 10% profit margin when y…

Funny you should mention that 30% number. That seems to be a kind of magic number where, for gross margins below that, you probably don't have a viable (small) business, in general.

For example, I've had discussions with people in one of my hobbies about this. It's a collecting hobby, so, being involved on the dealer side consists of obtaining inventory, marketing it to collectors, and selling for a profit. I've been told that you should always have at least a 30% gross margin on inventory, unless it's stuff you want to blow out because it's been sitting too long. In practice, what this means is you buy at somewhere between 60-75% of retail, normally (you can afford a smaller margin when you already have a client lined up to buy the exact thing you have, but that's not the typical case for a lot of dealers).

Re: Ask HN: How do custom software dev firms make money?

#80

Post by tixocloud »

edanm wrote: post #67
gharman wrote: post #32

I founded, grew, and sold a boutique software services co. Here's the skinny: * The core revenue model is charge customers a certain amount for doing work, and to have a lower internal cost. (duh) * Typically you're looking for a 30% margin or thereabouts; after cost of sales, consultant bench time (yeah you gotta pay that even when folks are idle, if they're employees), etc. you have maybe a 10% profit margin when y…

I also founded, grew and sold a boutique software services co., and am now running a new one. I agree with all of the above. The only major note I'd add is: some of the above really depends on who your clients are. For example, we work with mostly technical customers, taking on things that are not their core strength. But only customers who already have internal dev teams. The way we phrase is internally is "we want…

How do you get started with a custom dev shop? What type of technical companies would you focus on?
Post reply on HN