Evade the software paradox

Intro

The software paradox can be avoided and turned into an opportunity by creating a software offering that is profitable over a long period of time, and cannot be easily copied by the competition.

Cases

Why consider it?

More than ever, software is the driving force for change and innovation. However, it is increasingly difficult for software entrepreneurs to establish a healthy, thriving business since, more and more, customers expect software to be very cheap or even free. As such, software is the latest in a long line of economically critical resources that have (largely) lost their ability to differentiate themselves as a commodity. Just like oil in the 20th century, software is essential for today's economy but achieving a margin by differentiating the product itself is an ever greater challenge. Prices have been under severe pressure for the last decade and this is not expected to change.

Developing software was never easier! Combined with the fact that software can be distributed globally without great cost, many entrepreneurs are deciding to launch digital start-ups that can go global  from day 1. This trend is creating many opportunities but the flip side is that existing players that have invested in establishing a software-based IP position are being threatened.

In the software business, the relationship between value creation – offering more functionality and better performance – and the corresponding value capture – the part of the added value that customers actually want to pay for – is not clear-cut. It is gradually becoming more difficult to differentiate a product on the market, which leads to a lower ROI on R&D investments.

This phenomenon, called the software paradox, makes it far more challenging to create IP assets entirely based on software. This new reality has forced software developers to fundamentally rethink their offering. Is it still worth staying in the software industry? How do you adapt to this new context with so many 'too cheap to meter' commodities? Are there also other value creators that can be exploited in combination with software to open new horizons?

Since it is becoming more difficult to create intellectual property (IP) with software alone, one way of tackling the software paradox is to expand the software offer with new value creators.

What does it involve?

Successful SaaS companies are KPI-driven organisations

There are three ways of expanding the software offer with new value creators:

  • Data-based offering - This is a digital offering based on using a unique data set that you own, that you can generate or that only you have access to. In this model, data is the key asset and software is used to deliver the data to the customers. If the data set is protected, it can safeguard against the software paradox.
  • Ecosystem-based offering - This is a digital offering where the value is delivered by a community of people or organisations. In other words, others create value for you! This can be done in several ways (e.g. crowd sourcing, a marketplace business model). Creating the ecosystem can require a lot of effort but once the community has reached critical mass, it is very difficult for competitors to copy. In this model, the community is the asset and the software is used to deliver value.
  • Combining software and hardware -  This is an offering where the value is delivered by a combination of hardware and software. The idea is that without the physical hardware component the software is useless. The fact that hardware is (still) more difficult to copy provides better protection against the software paradox.

Further information

The digital métier is a domain on its own, with its own set of best practices and gotcha's. https://www.hyperscale-microcare.com/
http://www.sirris.be/blog/three-paradoxes-behind-successful-digital-business

Interested?

Contact person Agoria and/or Sirris: Peter.Verhasselt@sirris.be or carine.lucas@agoria.be