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Software development business models: What to choose for your business?

Software development business models: What to choose for your business?

July 21, 2020
by Svitlana Luts

Your project success depends on many things, and one of them is how you deliver your product and services and how you’ll receive income through this.

Software development business models describe how businesses deliver value to clients. It describes products that you provide and the way you get compensation. Every type of business model is different and has both advantages and disadvantages.

In this article, you’ll find the most popular business models explained, and we hope that it will help you pick the perfect type of business model for your organization.

Cooperation models

There are three typical cooperation models — time and materials, dedicated teams, and fixed price. The time and materials software development model allows modifying the team size and workload according to project requirements. Flexibility, transparency, and project control make this development model work well for projects with unclear requirements and multiple iterations.

Isn’t it wonderful to have a team of developers who are all about your project and blend seamlessly with your existing teams? The dedicated team model is the only approach that reflects this type of cooperation. After you have your requirements ready, you can receive engineers with skills that suit the needs of your project. Surely, team size and skillset changes are possible whenever needed.

Having a small project means the software development process will be less complicated and a fixed price model can be a good option in this case. Your vendor will define the project scope and provide you with proper estimation and cost. This approach requires thorough planning and business analysis as later modifications are impossible.

Remember, identifying the project type is the foundation of the right choice.

Software Development Business Models

Often the companies use a distribution approach, to deliver services or develop a product for their clients. There are three software development business models: cloud, on-premise, and hybrid.

On-premises software development business model

The first business model example is called on-premises. The on-premises business model for software development presupposes that software is installed and functioning within an in-house infrastructure of the client. This business model option has been used by Microsoft, Oracle, and SAP.

Why is on-premises software model the number one choice for particular companies? The on-premises distribution business model allows customizing a product as well as adjusting it according to the requirements. Simple integration with a client’s corporate system server is another advantage that makes this IT company business model attractive.

There’s no perfection in this world and the on-premises distribution approach is not an exception. Besides time-consuming implementation, it requires in-house server hardware and a support team. Distributing a product via a license model may prevent potential customers from making big investments due to the risks. Moreover, upgrading of customized on-premises software is a difficult process.

Cloud-based software development business model

The cloud-based distribution approach or Software as a Service business model is a method in which the software functions in the cloud service or at a hosting provider.

With the Software as a Service business model companies have access to the software via mobile device or a browser without installing software on their data centers. Nowadays more and more businesses opt for cloud hostings like Amazon Web Services or Microsoft Azure.

Benefits of cloud-based business model option

  • The cloud services implementation is a quick process.

  • Whenever your users have an internet connection they will be able to access the product remotely.

  • No initial setup costs are needed, your customers will have to log in, and you will receive revenue as long as they subscribe.

  • All your clients will be able to have the same version of the software, allowing you to provide maintenance to only one version of the software.

Disadvantages of cloud-based business model option

  • If your clients already have on-premise software or application there might be compatibility issues between on-premise and cloud software.

Hybrid software business model

Some businesses prefer a hybrid business model for software development. This is a combination of on-premises and SaaS models which lets your customers have their application installed on-premises and take advantage of cloud services as well. The balance of the strategies is determined by customers according to their needs.

The hybrid business model for software development is flexible (allows transfer data between cloud services and on-premises data centers); allows sending huge files and making seamless updates; allows storing sensitive data on-premise.

However, the approach is twice as difficult as on-premise or cloud model alone. It requires a bigger team of front-end developers to handle the interface tasks, updating software, and dealing with limited customization opportunities.

Source code licensing

There are two models of source code licensing: proprietary or open source software business model.

To protect software from copying, companies use proprietary software, as this software can’t be changed or reused by third-party users.

Open source software business model is totally opposite — users get access to both software and source code.

Revenue streams

Once you know your product distribution strategy choose a software revenue model for your income source. Mostly, companies use a combination of revenue streams to increase the number of users and income.

  • Paid apps. Customers are charged for installing a product.

  • In-app advertising. The application is free, however, you sell app places for advertising.

  • In-app purchases. The application is free, but you earn from selling products or services via an app.

  • Subscriptions. Users pay annually or monthly a subscription fee.

  • Usage-based software revenue model. Customers pay only for what they use.

  • Charges for support, enterprise services, and consulting.

Final thoughts

Take your time to think about what type of business model is best for your business. The internet connection we have nowadays allows us to use a mix of business models and revenue streams. The sky's the limit! We suggest creating an MVP to assess target customer expectations and figure out what software business model and revenue streams you are supposed to use.


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