Data provided here comes from our team of experts who have been working on business plan for a software development company. Furthermore, an industry specialist has reviewed and approved the final article.
What is the profitability potential of software development, and what income can be expected from software sales and licensing?Let's check together.
Revenue metrics of a software
What is the revenue model of a software?
The revenue model of a software is typically based on either sales of licenses or subscriptions to the software.
How does a software generate money?
Software generates money from licenses or subscriptions by essentially selling the right to use the software.
With licenses, a user typically pays a one-time fee to obtain a copy of the software and is allowed to use it indefinitely. This fee covers the cost of development and ongoing maintenance.
On the other hand, subscriptions involve users paying a recurring fee, usually monthly or annually, to access the software.
In this model, users are essentially renting the software, and the subscription fees provide a steady stream of revenue to the software provider, which can be used for ongoing updates, support, and improvements.
The subscription model often includes benefits like automatic updates, customer support, and cloud-based features, making it attractive to both users and software companies.
Ultimately, whether through licenses or subscriptions, the software company monetizes its product by offering customers the value of using their software in exchange for payment.
What's the average price of a software?
The average price of software can vary significantly depending on several factors, including the type of software, its complexity, the platform it's designed for, and the target market.
Consumer Software
Consumer software, such as mobile apps or desktop applications, often comes in a wide price range.
Many apps are available for free, while others may cost anywhere from $0.99 to $99 or more. The average price for consumer software tends to be around $20 to $50.
However, this can vary based on the app's features and its perceived value to users. Gaming software, for example, can range from a few dollars for mobile games to $60 or more for high-end PC or console games.
Enterprise Software
Enterprise software, which is designed for businesses and organizations, tends to be more expensive due to its advanced features and scalability.
The pricing for enterprise software can vary significantly based on factors like the number of users, the level of customization required, and the complexity of the software.
Small business software might cost a few hundred dollars, while large-scale enterprise solutions can cost thousands or even millions of dollars.
The average price for mid-sized businesses often falls in the range of $5,000 to $50,000 per year for software subscriptions, and the initial purchase price can be significantly higher for perpetual licenses.
Who are the customers of a software?
Software customers can be categorized into different types based on their needs and preferences.
Which segments?
We've prepared a lot of business plans for software projects. Here are the common customer segments.
| Customer Segment | Description | Preferences | How to Find Them |
|---|---|---|---|
| Enterprise | Large corporations and organizations with complex needs. | Customization, scalability, integration. | Industry conferences, business networking events. |
| Small and Medium Businesses (SMBs) | Small to mid-sized businesses with limited resources. | Affordability, ease of use, quick implementation. | Online advertising, social media, small business forums. |
| Startups | Newly established companies with innovative ideas. | Flexible pricing, collaboration features, rapid iteration. | Startup incubators, tech meetups, online startup communities. |
| Individual Professionals | Freelancers, consultants, and self-employed individuals. | Portability, time tracking, project management. | Freelance platforms, professional networking sites. |
How much they spend?
In our detailed analysis of the software market, we have identified that customers generally spend between $100 to $1,000 per year on a software subscription. These figures fluctuate based on the software's complexity, the features included, and the support package chosen by the user.
Insights indicate that the average subscription duration for a piece of software is from 1 to 5 years. Some users prefer short-term access, possibly for project-specific use, while others rely on long-term use, especially if the software is integral to their business operations.
Given these variables, the estimated lifetime value of an average software subscriber would be from $100 (1x100) to $5,000 (5x1,000). This accounts for varying levels of software packages and the duration customers subscribe to them.
With this data, we can reasonably estimate that the average revenue per customer for a software company would be around $1,550. This figure is derived from considering both the lower and upper ends of annual spending and the subscription duration.
(Disclaimer: the numbers provided above are averages and general estimates. They may not accurately reflect specific circumstances pertaining to your individual business model.)
Which type(s) of customer(s) to target?
It's something to have in mind when you're writing the business plan for your software project.
The profile that typically has the most profitable customers for software is the "Ideal Customer Profile" (ICP), which consists of businesses or individuals who align closely with the software's value proposition and are willing to pay for it.
These customers are the most profitable because they have a genuine need for the software, derive significant value from it, and are willing to invest in its features and services.
To target and attract them, it's crucial to conduct market research to understand their pain points, preferences, and buying behavior. Craft tailored marketing messages and campaigns that directly address their needs and showcase the software's benefits. Use targeted advertising, content marketing, and partnerships with industry influencers to reach them effectively.
To retain these profitable customers, focus on delivering exceptional customer support, ongoing product improvements, and personalized experiences. Regularly gather feedback and make adjustments based on their input to ensure the software remains valuable to them, thus fostering long-term loyalty and profitability.
What is the average revenue of a software company?
The average monthly revenue for a software company varies significantly, typically ranging from $10,000 to $100,000, depending on various factors like the market demand, business model, and product uniqueness. Let's delve into different scenarios to understand this better.
You can also project your own revenue using different assumptions with our financial plan for software startups.
Case 1: A basic software solution from a small startup
Average monthly revenue: $10,000
This type of software company is likely a small startup, operating remotely or in less expensive areas. It may offer a single, basic software solution, useful but with limited features, often catering to a niche market segment or small businesses.
Such companies typically don't have extensive sales or marketing strategies, relying mostly on organic growth or word-of-mouth referrals. Their revenue primarily comes from either one-time software purchases or a subscription model.
Assuming the company sells its software solution for a $100 one-time fee or a $10 monthly subscription and acquires around 100 new customers per month, the revenue would be approximately $10,000.
Case 2: A growing software company with multiple product offerings
Average monthly revenue: $50,000
This business represents a mature startup or a medium-sized software company, possibly located in a tech hub city. This company offers multiple software products or a comprehensive suite with various features, targeting a larger and more diverse market.
Unlike the basic software startup, this company invests in active marketing campaigns, partnerships, and may also generate revenue through add-on features, customer support, or platform customizations. They likely operate on a Software as a Service (SaaS) model, which ensures a consistent revenue stream.
With a more robust clientele and assuming they charge around $50 per user for a monthly subscription and have about 1,000 active users, this company could pull in $50,000 per month.
Case 3: A leading software company with advanced solutions
Average monthly revenue: $100,000
This category includes top-tier, possibly multinational companies known for their innovative and comprehensive software solutions. They are trendsetters in the industry, offering high-demand products packed with cutting-edge features, and cater to a wide range of businesses, from SMEs to large corporations.
Such a company pours significant investment into research and development, customer service, and aggressive marketing strategies. Their revenue streams are diversified, including various subscription plans, licensing fees, on-premises solutions, cloud services, and consultancy.
Given the premium nature of the services, the company might charge around $100 or more per user for a monthly subscription. With a broad customer base, including numerous large-scale businesses and assuming they maintain at least 1,000 subscribers, this leading firm could generate monthly revenues of $100,000 or more.
The profitability metrics of a software
What are the expenses of a software?
Software expenses include development costs, licensing fees, maintenance, hosting, and marketing and advertising efforts.
| Category | Examples of Expenses | Average Monthly Cost (Range in $) | Tips to Reduce Expenses |
|---|---|---|---|
| Hosting and Infrastructure | Cloud hosting (e.g., AWS, Azure), server maintenance | $100 - $10,000+ | Optimize resource allocation, use reserved instances, consider serverless options |
| Software Licenses | Operating system licenses, software tools, third-party libraries | $50 - $500+ | Explore open-source alternatives, license consolidation |
| Salaries and Labor | Developer salaries, QA testers, project managers | $3,000 - $20,000+ | Efficiently manage team workload, consider outsourcing, use freelancers |
| Marketing and Advertising | Online ads, SEO services, social media marketing | $500 - $5,000+ | Focus on targeted advertising, measure ROI, use organic growth strategies |
| Customer Support | Helpdesk software, support staff salaries | $500 - $2,000+ | Implement self-help resources, prioritize customer education |
| Maintenance and Updates | Bug fixes, feature enhancements, code refactoring | $1,000 - $5,000+ | Implement agile development practices, prioritize critical updates |
| Utilities and Office Space | Electricity, internet, office rent | $200 - $2,000+ | Optimize energy usage, consider remote work options |
| Insurance | Professional liability insurance | $50 - $200+ | Shop around for competitive rates, review coverage regularly |
When is a a software profitable?
The breakevenpoint
A software company becomes profitable when its total revenue exceeds its total fixed and variable costs.
In simpler terms, it starts making a profit when the money it earns from selling software licenses, subscriptions, or services becomes greater than the expenses it incurs for development, salaries, hosting, equipment, and other operating costs.
This means that the software company has reached a point where it covers all its expenses and starts generating income; we call this the breakeven point.
Consider an example of a software company where the monthly fixed costs typically amount to approximately $50,000.
A rough estimate for the breakeven point of a software company would then be around $50,000 (since it's the total fixed cost to cover), or selling between 500 and 1,250 licenses if the price ranges from $40 to $100 per subscription. This scenario doesn't account for variable costs, which could alter the calculation significantly.
It's essential to understand that this indicator can vary widely depending on factors such as the company's scale, market demand, operational costs, and competition. A large software firm with extensive offerings would obviously have a higher breakeven point than a startup that doesn't require substantial revenue to cover their lean expenses.
Curious about the profitability of your software company? Try out our user-friendly financial plan crafted for software companies. Simply input your own assumptions, and it will help you calculate the amount you need to earn in order to run a profitable business.
Biggest threats to profitability
The biggest threats to profitability for a software company often stem from competition, changing technology trends, and unforeseen expenses.
When many companies offer similar software solutions, it can lead to price wars, reducing profit margins.
Additionally, as technology evolves rapidly, a failure to adapt and update software can render it obsolete, causing customers to switch to newer options.
Moreover, unexpected costs such as legal disputes, security breaches, or software bugs can strain financial resources.
Lastly, a lack of effective marketing and customer support can hinder customer retention and acquisition, impacting overall profitability.
These threats are often included in the SWOT analysis for a software.
What are the margins of a software company?
Gross margins and net margins are financial metrics used to assess the profitability of a software business.
The gross margin reflects the difference between the revenue earned from software sales or subscriptions and the direct costs involved in creating and maintaining the software.
Essentially, it's the profit remaining after deducting costs directly related to software development, such as programmer salaries, software licensing fees, and cloud hosting services.
Net margin, however, incorporates all the expenses experienced by the software company, including indirect costs like administrative expenses, marketing, office space, and taxes.
Net margin offers a comprehensive view of the software company's profitability, encompassing both direct and indirect costs.
Gross margins
Software companies typically have an average gross margin ranging from 70% to 85%.
For instance, if your software company earns $50,000 per month, your gross profit will be approximately 80% x $50,000 = $40,000.
Let's illustrate this with an example.
Consider a software company with 100 users, each paying $200 for their subscription. The total revenue would be $20,000.
However, the company incurs costs such as cloud services, development tools, and staff salaries.
Assuming these costs total $4,000, the company's gross profit would be $20,000 - $4,000 = $16,000.
Thus, the gross margin for the software company would be $16,000 / $20,000 = 80%.
Net margins
Software companies typically have an average net margin ranging from 15% to 30%.
So, if your software company generates $50,000 per month, your net profit will be approximately $10,000, representing 20% of the total revenue.
We'll use the same example for consistency.
Let's say our software company has 100 users, with each user paying $200 for their subscription, thus generating $20,000 in revenue.
The direct costs, as outlined earlier, come to $4,000.
Additionally, the company faces various indirect costs like marketing expenses, office rent, insurance, legal fees, and taxes. Suppose these additional costs total $10,,000.
After accounting for direct and indirect costs, the company's net profit stands at $20,000 - $4,000 - $10,000 = $6,000.
Consequently, the net margin for the software company would be $6,000 / $20,000, equating to 30%.
As a business owner, it's crucial to recognize that the net margin (vs. gross margin) paints a more accurate picture of your software company's actual earnings, as it takes into account the complete range of costs and expenses involved.
At the end, how much can you make as a software company owner?
Now you understand that the net margin is the indicator to look at to know whether your software business is profitable. Basically, it tells you how much money is left after you have paid for all the expenses.
The amount you will make will, of course, depend on how well you execute your business strategies and manage product development.
Struggling software company owner
Makes $2,000 per month
If you start a small software company and make decisions such as underinvesting in technology, ignoring market research, neglecting customer support, and not diversifying your software offerings, your total revenue might stall at around $10,000.
Moreover, if you don't manage your operating costs effectively, there's little chance that your net margin (profitability) will go above 20%.
In simpler terms, this means that your monthly earnings would be limited to a maximum of $2,000 (20% of $10,000).
So, as a software company owner, this is the worst-case scenario for your income.
Average software company owner
Makes $10,000 per month
Suppose you decide to run a standard software company with decent product offerings. Your company launches reliable software, and you offer periodic updates, customer support, and additional features or services for purchase.
You're making some efforts. Your total revenue can reach up to $50,000.
By effectively managing your expenses, mainly development and marketing costs, you can aim for a reasonable net margin, possibly around 30%.
In this situation, your monthly earnings would be approximately $10,000 (30% of $30,000).
Outstanding software company owner
Makes $70,000 per month
You are committed to excellence, driving innovation, and delivering exceptional user experience. You understand the market demands, invest in top-tier talent, prioritize customer service, and continuously evolve your product based on consumer and market feedback.
With such high-quality software solutions, the total revenue could soar to $200,000 or more.
Additionally, you implement effective expense management strategies, perhaps even securing favorable contracts and partnerships, resulting in superior cost control. This adeptness leads to a net margin of 35%.
In this scenario, the monthly earnings for the outstanding software company owner would amount to approximately $70,000 (35% of $200,000).
We hope this becomes your reality! If you aspire to be an exceptional software company owner, it all begins with a well-crafted business plan for your company.