The Chronicles of Stuffed Guys

I’ve recently finished reading a book by Michael A. Cusumano called “The Business of Software“. It helped to crystalize in my mind what was already obvious: the difference between a products oriented and a services oriented company.

Products oriented model is very scalable. You create and sell you own software, usually the only services you provide is support. The labor requirements increase only slightly when you sell 10 licenses of your software per month and then start selling 1000 licenses. With a hit product your profit margin can reach ridicoulos proportions. That’s why so many software companies prefer products oriented model.

With a services oriented model you provide custom programming services to your customers. This model is much much less scalable then a products oriented model and has much lower profit margins. Basically the profit margin is constant with limited ability to increase: it stays the same if you have 50 programmers on staff or 1000 programmers. Also, if your business increases you always have to hire additional people, you actually have to do it proportionally to the increase. Taking into account that it’s usually hard to find good people this model becomes even less attractive.

But the truth is — it’s very hard to create a best-seller product. And even if you would manage to do it, there is no guarantee that one or more competitors will not appear copying the main features of your product and offering their own products at a more attractive price. It’s hard to create a best-seller and it is even harder to repeat the success with the next product.

So there is a sense in a hybrid business model (as Michael Cusumano calls it), when a company creates and sells its own shrink-wrapped software, but also provides custom services to its customers.

The hybrid model is what I am thinking to use for Stuffed Guys. In my opinion it decreases the risks significantly and makes the business model much more balanced. When our two products will be ready and launched, I plan to aggressively promote our customization and custom web programming services along with them.