The Economics of Software Development – From Fixed to Variable Costs

June 9, 2021
The Economics of Software Development – From Fixed to Variable Costs

Are your profit margins actually where you think they are?

When it comes to cost structuring – not all approaches were created equal. That applies twice for tech startups who seem to have a harder time trying to calculate their cost of goods sold (COGS). This basic accounting principle often gets skewed by software developers. This can be a red flag for potential investors and affect your business's scalability.

It can be a little trickier to gauge the COGS of a digital product because most of the expenses lie in the development and maintenance aspects. Traditional manufacturers have massive costs associated with the actual output of physical products. Digital producers, however, are able to copy for very little. While this fact can be helpful for startup margins, it does often lead to some oversights.

Fixed Cost-Structuring

A software company in the modern age will still have some COGS considerations. You need to pay for hosting and any 3rd-party software that is built into your product. Also, consider premises, infrastructure, and operating expenses. From here it is personnel that need to be accounted for.

You have your team of developers, of course, and the sales team. You may have a marketing department or administration personnel, both of whom need expenses. With all of these costs built into the COGs, the organization is financially rigid, and there can be some problems with this approach.

Utilizing this more traditional approach can lead to inefficiencies within the organization. Not every developer is going to be playing to their strengths all of the time. Not every project is going to be profitable. With all the development costs built in such a static manner, all the data that would tell you where to lean up or move on falls through the cracks. But there is a better way.

Variable Cost-Structuring

It's best to divide the cost structure up between general (non-allocated) and project/product-related (allocated) expenses. This gives the companies far more data about their cost-efficiency. This approach coincides very well with ditching the model of hiring in-house developers. By allocating costs on a per-project basis and using an on-demand developer service you can enjoy many benefits.

As demands fluctuate, you can scale your business up and down with ease. You will also get a far clearer picture of which projects are profitable and which are not. Unlike the former approach, the cost of each project is obvious –  and not absorbed into the companies general expenses. This approach allows you to take control of your companies cost structuring fare more effectively thanks to software development services.

NerdCloud is one such development partner that allows companies to reap the rewards of financial agility. This service is leading the way in reshaping how startups think about product development and cost structuring. NerdCloud is the most scalable way to buy additional resources for software development. We provide a cloudlike subscription model and a fully managed global network of senior developers - software development as a service! 

The ability to scale up or down quickly, without having to hire new employees or draw up new contracts allows you to future-proof your startup. Maintain capital-efficiency. When it’s time to pitch for that next round of funding – you are going to have a real edge if you can mitigate the inefficiencies of a rigid company structure.

Get in touch and find out more about how NerdCloud can support your software development goals and give you real control over the cost of running your business.

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