Why software costs what it does.

Vertical application software, software written for a certain industry, is very time consuming to develop. People have to support their families while developing software, just as storm adjusters must support their families both while on storm and off storm. This means there is usually a large outlay of capital required to get a program written. Once the program is written, documentation must be created. Once all this is done, then sales may commence. Since there is often much sunk cost, this sunk cost must be recovered on the sale or lease price, as well as the cost to continue marketing and support the software.

This leads to the prices we see for software today. And lets take a look at how the software cost breaks down for a software company. If a package costs 40 dollars a month, the yearly cost is four hundred eighty dollars a year. Out of this forty dollars a month, the software company must recapture the capital used to develop the software, cover ongoing marketing costs and pay for the personnel to support the current users.

And consider who these support personnel are, or should be. They must not only know the software package backwards and forwards, but they must know the operating system as well. This operating system could be Windows 95, Windows 98, Windows Millennium, Window NT or Windows 2000. Each has its own peculiarities and takes time to learn. So this support personnel has to have development knowledge, computer operating system support knowledge and the patience of a saint to deal with stressed out end users. This is exactly the type of technology worker that the big companies drool over. This means they have other opportunities available and often quickly learn to detest end user support. They soon seek employment elsewhere.

Has anyone tried Microsoft support recently? Last I used it, it was 35.00 an incident for apps such as Word, and basically the guy on the other end of the phone was reading the support articles from the Microsoft Knowledge Base, which is posted on-line. This is almost as expensive as the monthly lease for a claims package, and does not have the potential to increase your income like the estimating package does. And even Microsoft has huge turnover in there phone support techs because it is so stressful.

And consider this, how much work would an adjuster do for forty dollars a month. Not forty dollars an hour, which is roughly sixty percent of sixty-five dollars an hour, but forty dollars a month. Now consider not only do you have to do some work for this price, but you are to re-coup your sunk development costs as well. Are you going take this assignment? This does not paint a rosy profit picture to a business.

For years I have felt that the problem with the insurance estimating market is that there is not enough money in it. This lack of money drives the technology talent to other fields where the compensation is better, and often the stress less. The large companies cannot justify the capital outlay required to stay current on technology since the programs do not produce enough revenue to be profitable, and soon fall into disfavor with the business managers. The mom and pop shops have a hard time handling the support that is required for any software package, while making enough money to re-coup the development costs of the program. The few successful small insurance software shops I know have become successful through other means than just software sales.

Copyright 2001  Jeffrey B. Goodman. All rights reserved.
Revised: November 27, 2001 .