Software Startup Advice from MIT Professor

"If you are starting out in the software business, Michael Cusumano has some advice for you: think hard about whether to specialize in products or services, and take a serious look at trends in the industry. For the past 20 years, Cusumano has been consulting with and researching some of the top high technology companies worldwide.

He has seen software companies enter the market with a “killer application,” make some good profits, only to find their product “commoditized.” In one case he describes, the price of a software license fell from $1.5 million in 2000 to $250k today. And, he cautions, 'in bad economic times, product sales can fall off a cliff.' So what works? 'The only guaranteed revenues for software companies may be services and maintenance revenues,' Cusumano says. In fact, his research shows one company after another (PeopleSoft, Oracle, SAP, for instance) transitioning from products to services in order to survive.

Cusumano has graphed so many of these corporate “criss crosses” that he considers them “life-cycle models.” Only one company, he says, has managed to stay exclusively true to product sales: Microsoft.

To succeed, 'most software products companies become services or hybrid companies…where you’ve got the basic product and build some custom features or a special interface, so the solution you’re selling becomes much stickier.'”

Watch Professor Cusamano of the MIT Sloan School of Management deliver a lecture in which he elaborates on the foregoing.