A Complete Guide to Learn Software Business Models

Are you looking to understand software business models? Do you want to create software for your business and look for ways to sell and promote it?

As a founder, you must be aware that the market size of business software is constantly increasing. A report by GrandViewResearch suggests that the revenue of business software and services will reach USD 1,153.7 billion by 2030.

So, if you are planning to develop software and sell it in the market, you might want to choose the most beneficial business model for it.

Therefore, to help you choose the right business model and clear your doubts about different types of business models, we have written this article. By the end of this blog, you will learn about what is software business model, its types, the pros and cons of each business model, and tips to choose the most suitable model for your business software. Let’s get started.

What is the Software Business Model?

A software business model is a skeletal framework or the plan a company follows to make money by generating revenue, gaining profits, and delivering high-value to its customers.

A software business model contains all the methodologies and strategies the company’s leadership builds that help them to run the business.

What are the Ideal Characteristics of a Software Business Model?

The ideal software business model consists of the following characteristics:

  • The distribution approach or how you provide products/services to your customers—on-premise, cloud, hybrid.
  • The licensing of the source code you create—is your software proprietary or open-source code?
  • The software revenue stream which determines how are you going to be paid for your products/services or what revenue model you’ll follow.
  • Business model interaction wherein you choose a one-to-many approach where providers solve customer problems (Microsoft Office, for example) or a many-to-many approach where end-providers and customers meet on your platform (Airbnb, for example).
  • Lastly, your target audience—B2B (selling to businesses) or B2C (selling to customers).

Let’s now look at the successful business model options for the software.

Which are the Different Types of Software Business Models?

There are 6 types of software development business models. In the following table, we have described each of the business models in brief. So you get a basic understanding of each.

Types of Software Business ModelDescriptionExamples
Traditional (on-premise)On-premises business model where you charge upfront one-time perpetual license fee from your customers. You can create additional revenue streams for your on-premise products through annual maintenance charges.
  • SAP
  • Microsoft
Open-SourceIn the open-source model, the base software is freely accessible. You sustain yourself through maintenance or support services charges only. As a result, it is not suitable for many types of software.
  • Android
  • RedHat
OutsourcingThe outsourcing business model was spearheaded in India due to the massive availability of the workforce and low labour rates. Users outsource traditional business maintenance features to you in this software development business model.
  • Tata Consultancy Services
  • Wipro
  • Infosys
HybridIn the hybrid software development business model, apart from the perpetual license and maintenance charges, you take up the responsibility of maintaining the security, performance, and availability of the software while charging a nominal fee.
  • Oracle
Software as a ServiceYou deliver this software via cloud services (cloud-based distribution approach), eliminating initial setup costs. Low standardization and automation make it easier to scale your software business. You charge a recurring subscription fee in exchange for access to the software.
  • Tata Consultancy Services
  • Shopify
  • Canva
InternetThe internet business model includes hosting your services through websites. However, you don’t directly charge your customers for using the platform. Instead, you create alternative revenue streams by monetizing ads or charging a small fee for the transaction done through the websites.
  • Facebook
  • Google

Now that we’ve scanned through the characteristics of the software distribution business model, let’s dive into the details of these business models.

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5 Software Business Models Explained in Detail

Here’s an in-depth explanation of these business models and the pros and cons of each software distribution model.

  1. What is the On-premise Business Model?

  2. The traditional business model, also known as the on-premise model, involves charging an upfront price to the user. With the use of advanced software development technologies, the on-premise softwares are created to meet the expectations of end-users. So customers pay to use the software product with getting lifetime access.

    However, the cost varies depending on the number of users in their organization; sometimes, it can be higher than $4000/user. In addition to this one-time payment, you receive revenue from an annual maintenance charge for the on-premise software.

    ProsCons
    • On-premises software model enables you to tailor your software product to your client’s requirements.
    • Simple integration with other corporate systems over the intranet will greatly help your clients.
    • Setting up the servers, networks, and powerful hardware to support on-premise capabilities takes time.
    • Your clients might not feel sure about investing a considerable amount upfront for on-premises software.
  3. What is the Open Source Business Model?

  4. In the open-source software business model, the proprietary software is free to download, and users gain access to the software as well as the source code. But you charge an annual fee for maintenance and continued support for the software. This business model may sometimes prove to be unsustainable and can cause losses.

    Therefore, most open source software companies must create additional paid features to increase their revenue. Some companies also have to adopt multiple licensing models for their software. For example, MySQL is open-source software. To earn from the software, MySQL offers several versions of its database to companies based on their business and technical requirements and charges against it. So, if you are looking to create open-source software, then learn how to hire offshore software developers for your project.

    ProsCons
    • The software is updated regularly as thousands of intelligent developers work on the code together.
    • You do not have to spend money on customizations. The software used is free to modify to suit their business needs.
    • Open source software attracts more customers due to its aggressive pricing or lack thereof. So, you can cut back your marketing budget.
    • Open source software model usually creates software to meet the needs of the developers. Hence, it is not user-friendly for non-technical users.
    • Establishing a recurring software revenue model using an open-source business model is challenging.
  5. What is the Outsourcing Business Model?

  6. The outsourcing business model is to create or buy readily available software from a vendor and outsource its maintenance and support to a third-party development company for fewer charges. So software customers started looking elsewhere to cut down on the annual maintenance charges.

    Thus, giving rise to the outsourcing business model. For example, users create the software by hiring developers from a reputed software development company and outsourcing the maintenance to other software companies for lesser charges.

    The annual charge is also drastically less. You must be wondering, how is it sustainable? To make it a viable model, you must outsource in a relatively low-wage country compared to your country. Furthermore, you will need to maintain a massive workforce to do the maintenance task.

    ProsCons
    • Attracting other businesses is easier due to the competitive pricing structure.
    • Higher profit margins as the expenditures are lower as you outsource development.
    • The massive workforce enables you to take on bigger projects and expand your services.
    • Since you have to maintain a massive workforce, chances of miscommunication also drastically increase.
    • The quality of deliverables might decrease due to a lack of experienced professionals in the back end of your maintenance pool.
    • Again, the sheer size of the labour force might make you lose control over the daily workloads.
  7. What is the Hybrid Business Model?

  8. The hybrid business model is the combination of SaaS and on-premise software applications. In Hybrid business models, you need to take up the responsibility of handling the security, performance, and availability of the software as well.

    Of course, at an added fee the customer pays for your services. Now, this works for a couple of reasons mentioned below.

    • It lightens the burden on the client’s company in exchange for a nominal fee.
    • The client offers it to a software creator who is well-equipped to handle the security.

    There is also a Hybrid+ model which wraps these offerings and sells them as a monthly subscription. To achieve it, you need to hire talented software developers who have experience in creating software solutions for various industries like logistics, healthcare, retail, real estate, and fintech.

    ProsCons
    • You can generate more money for the business through this model.
    • The hybrid model approach allows you to sustain your open-source software business.
    • You need to expand your workforce to take care of these new aspects of software services.
    • In case of security breaches or sensitive data leaks, your software becomes liable for the damages caused to your client’s business.
  9. What is the Software as a Service (SaaS) Business Model?

  10. The SaaS model means to sell cloud-based software products for a certain subscription fee. Companies make SaaS software flexible enough so that users access it via a mobile device without installing software on their physical devices.

    In this model, you design to provide it via cloud services or a hosting provider. Additionally, you can schedule the updates of your software after a certain time by applying the software development life cycle.

    The decreased standardization of the maintenance schedule enables you to create an aggressive pricing framework for your service. As for the pricing, you charge a recurring monthly or annual fee (subscription) from the users to access your software.

    ProsCons
    • SaaS business is highly scalable as you provide real-time information.
    • You can create a stable cash inflow from the flexible recurring subscription model of SaaS.
    • You have to spend more money on marketing to acquire customers. The conversion funnel is also longer and receives more passive prospects than any other business model.
    • The barrier to entry is lower. Any company with sufficient resources can easily replicate the features of your software.
    • You must maintain an in-house data analytics team to continuously provide real-time information to your customers
  11. What is the Internet model?

  12. The internet business model is to monetize your online platforms with ads. The business model is also sometimes referred to as an asymmetric business model. This is because you are not directly charging your clients or customers.

    Another way of monetizing your internet business model is to take a small fraction of the transaction made through your platform. However, your web-based software solution needs high traffic to create a stable revenue channel.

    ProsCons
    • You can easily cater to a larger audience as your software is made accessible through the web browser.
    • The long-term cost of maintaining the websites is comparatively less than other business models.
    • Takes a long time to establish a stable income stream.
    • Internet companies are under heavy scrutiny due to multiple recent data breaches and leaks

As you know the various models, let’s look at ways to monetize your software business.

What are the Different Revenue Streams of Software Businesses?

Here are the different software revenue models for your business.

  1. Transaction Model

  2. The traditional method of revenue generation is where you exchange your product for monetary compensation. This model requires more marketing and sales management.

    There are a few different types of transaction models. Here is the name of the transaction models.

    • The one-time purchase transaction model where customers buy the software by paying a certain amount.
    • Subscription-based transaction model where customers pay a monthly amount to access the software.
    • Pay-per-use where customers only have to pay whenever they use your software.
  3. Advertisement-based Model

  4. Advertisement-based revenue model creates stable cash flow by selling ad spaces. High-traffic web-based softwares quickly generate millions in revenue through advertisements only. You can also sell ad spaces in your web-based software. However, you need to be careful with the placement of ads to avoid turning away your customers.

  5. Commission-based Model

  6. In the commission-based model, you make some money for every transaction that happens through your platform. You can also charge a flat rate—a guaranteed amount of money irrespective of the transaction size. Similarly, you can also set a percentage limit for the transaction. Lastly, you can combine both to create an optimal revenue stream.

  7. Donation-based Model

  8. Most open-source code developers relied on voluntary donations. However, the revenue most businesses generate by this method is sporadic, unpredictable, and unstable.

  9. Affiliate Model

  10. Affiliate revenue is much like the advertising revenue model. But, instead of selling ad spaces to companies, you promote the services of some other company via your app. Such companies may pay you to become their affiliate. Also, you automatically get a cut each time an end consumer buys the product or service through the link.

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Now, check the next section of frequently asked questions to find the answers to questions most searched by users on Google.

FAQs About Software Business Model

  1. What is the main difference between a software business model and a software plan?

  2. A software business model sets the foundation for how the software company will generate revenue and sell its software products—via on-premise data centers, hybrid, or cloud model/cloud infrastructure. Whereas a software plan will have more in-depth information about all the processes involved in making the software and its working.

  3. How do technology companies use software business models?

  4. Established software companies review and adapt frequently based on customer requirements. While new businesses rely on software business models to get off to the right start, ensuring that they tie their decisions to the overall business strategy.

  5. How to validate your business model?

  6. Create collaborative software business models to collect feedback and improve accordingly. And list down the goals you want to achieve through the plan as they will become proof points that your model is working.

Choose the Best Business Model for Your Software

Now, you must have a good idea of the different software development models. However, knowing the basics might not be enough to create an effective software system on the first try. Planning the model takes time, research, and resources. Then comes the difficult part of turning the plan into measurable progress.

At Space-O Technologies, our team of software developers will help you with your business model. We will help set up the processes and create realistic expectations for your software business model. Get in touch with us.

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Rakesh Patel

Written by

Rakesh Patel

Rakesh Patel is the Founder and CEO of Space-O Technologies. He has 28 years of IT experience in business strategies, operations & information technology. He has expertise in various aspects of business like project planning, sales, and marketing, and has successfully defined flawless business models for the clients. A techie by mind and a writer at heart, he has authored two books – Enterprise Mobility: Strategy & Solutions and A Guide To Open311.