To Service is to Profit

Tell a software developer that the real money has always been in services, and you beg being punched in the nose.  Those software types are a violent bunch.

The truth is that services have always been the largest profit center in the software world.  We may faint when presented with a software licensing invoice, but happily scribble our signatures on the adjoining support services contract that will cost 15% of the license cost every year, knowing that in technical support hours we will never come close to regaining the cost.

Services — regardless of if it is simple technical support or an implementation master plan from IBM Global Services — are products with value for the customer and even more value for the vendor.  Service margins tend to be fat, and the selling of services requires almost no additional effort once the product is installed.  This is nothing new, and has driven the software business since ones and zeros were invented.  Heck, Computer Associates made a fine living from acquiring existing products and the associated installed base, and milking the support revenue alone.

I bring this up because we have witnessed some recent and otherwise seemingly bizarre examples of major vendors dancing the Service Shuffle.  First came Oracle proffering Red Hat support service as discount pricing.  Then HP offered support for Sun’s Solaris.  And everyone seems to be offering support for MySQL.

There are two market(ing) dynamics at play.  First is that people will pay good money … or, in a pinch, American currency … for the insurance policy that is technical support.  When you risk the very operation of your business on a piece of software that cannot instantly be replaced by a competing product, a 15% annual fee is cheap insurance.

The other dynamic is the desire to have "one throat to choke" when it comes to support.  This is why HP can charge for supporting Solaris running on HP computers, because HP customers would like to have just one vendor for the support of their preferred hardware (HP) and their required software (Solaris).  It is not a bad strategy either in as much as Sun makes nothing on Solaris, and having HP take hardware sales from Sun adds to Sun’s market miseries.

As for Open Source, service has always been the economic driver given that charging for software licenses ranges from illegal to non-competitive.

These market dynamics do not adequately explain Software as a Service (SaaS), which breaks traditional tech support models.  Customers tend to view it as an ongoing, volume-based support contract without any of that messy software licensing business.  Vendors also view it as such, and also providing the added service of hosting the software and removing that technical tedium from the customer.

The take away here (yes, you knew there would be one) is that services have always been, and will likely always be, part of your revenue model.  This should not be an after thought, but should be part of your go-to-market strategy.  Heaven help the start-up pitching to a venture capitalist who has not included services revenues as part of their business plan.


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