Math of a Software Lifestyle Business

Nov 2014

 

“There are some things that you can fulfil with money, but at the end of the day these are not the things that make you happy. It is the small things that make life good.”

– Sebastian Vettel

 

“Getting organized in the normal routines of life and finishing little projects you’ve started is an important first step toward realizing larger goals. If you can’t get a handle on the small things, how will you ever get it together to focus on the big things?”

– Joyce Meyer

 

Software is cheap to create and most of the income earned from a software product is pure profit. Most of the costs are inexpensive. The only inputs to create software is time. If the only thing required to make something is time, then that thing is also cheap to make. It didn’t used to be like this. Rewind a decade or two and software was expensive to create because the tools were still in its infancy. You required expensive hardware to build sophisticated software. Today you don’t. It’s why internet companies are amazing.

Software is thus a craft in the sense it is the 21st century equivalent of what 15th century carpenters and blacksmiths used to do. They could carve a living for themselves using their skill and their hands. They would physically build a product which they would sell. Software is the digital version of this but amplifies your productivity because it can be written once and deployed an infinite number of times. You don’t build a chair then sell it. You build a chair making machine.

But building software is not enough. To earn a livelihood you have to build a software business. To do this, you decide what the product does. Spend time building the software. Then you find people who pay you to use it. As more people use it, the company grows. Simple. Let’s put some numbers to this.

A million dollar company is about 4,000 customers giving you $20 per month. That is very hard to do but not very complicated. It is hard in the sense that doing something arduous for a long time not that solving a complex problem is hard. It’s more running a marathon, not solving calculus.

A million dollar company is this metric that is worthwhile to focus on. It’s the movie idea of what is success. But most people would be happy with a business that pays a salary and gives them freedom. To make a $50k per year salary from an app. You need only 200 people to give you $20 per month.

The universe of things that you could provide to 200 people that would provide $20 of value per month is huge. This is 200 people in the entire world. The more people who’s lives can be improved. The more people who can save money. And the more people who can earn more money as a result of giving you $20 will be how many customers there are and how large the company could get.

To get someone to pay you $20 per month, you need to either save them $50 per month or help them earn an extra $50 per month. Or to give them a unique experience. It’s worth noting that saving someone money can also be the same thing as saving them lots of time. So they will also give you $20 per month if you can save them N amount of time where N is what their time is worth. So if a persons time is worth $50 per hour, and you save them 2 hours, they will pay you $20.

As you scale those two numbers, you can start to charge more and grow faster. The amount you charge and how fast you grow will be interlinked variables. The more you charge the slower you will grow but more profit will be made. The less you charge the faster you will grow but less profit will be made. And the amount you charge and the rate of growth will be cantilevered by how much value is created by purchasing it.

This is what makes pricing a product such a difficult task because it means trying to find the optimal balance of these 3 variables. The price of the product, how much value is created and the rate of growth. Now to experience hyper growth, the promised land of all technology companies, you need to change this mechanic from incremental value being provided to order of magnitude more value.

In practice this means if you can help someone earn $500 or $5,000 per month or save them $500 or $5,000 per month or save 10 or 100 hours of work or provide a very unique experience but only charge $20 per month. Then that is a recipe for a hyper growth. If you offer that much value for such a relatively small cost, you’ll have people practically knocking down your door to try the product. If you can figure out a way to do that profitably and sustainably then you will have a huge company in no time.

A $100k salary, the common target of people entering corporate to benchmark success is 400 people giving you $20 per month. That would not be terribly difficult to do. Way easier than holding a job for the rest of your life.

The average person works around 2,000 hours per year. Over 10 years, that will be 20,000 hours worked. The time it takes to build a company to the same point as a salary is about 3 years. That is 6,000 hours. What could happen if you decided to create a product and invested 6,000 hours into it.

Doesn’t it seem like it would be easy to find 200 people to give you $20 per month if you spent 6,000 hours trying to get them?

This is of course not the only things the time is spent doing. There is also support, maintenance etc. But the point is that it is not an entirely unachievable goal. It is closer to the opposite. It is easy when done with the right perspective. Small things growing slowly is how big things are created.

This is assuming that not a lot of money has been spent creating the company. If you spend money before you start, you end up needing to build a bigger company just to get to the same point than if you spent a smaller amount. It’s why you should try and spend as little money as possible. This is one of the most important and hardest lessons to learn. Frugality in business is almost universally rewarded.

It also means if you sell the business, you’ll make more because you only had to recoup a smaller amount, the cost it took to start in the first place. When a business is sold it will net some money. Usually some amount based on its revenue. A software product, like any business, that makes money and has people using it will have purchasers ready to buy it.

The wisdom that it takes money to make money is wrong here. That is only in fields where the reward is a multiple of the amount invested like stock trading. Software changes that differential so a meaningful company can be built without spending a lot. It’s also why raising money from investors can be the worst mistake because it removes all of the options of creating a small but great business. Many more people have been burnt by having investors than by striking it on their own.

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