My CodeFez colleague, Nick, just posted an interesting editorial on the economics of developer tools, particularly with regard to Borland. Nick points out that businesses are justified in maximizing profits versus, say, maximizing revenue or expanding market share. While this may be true (and I don’t claim to be any more of an economist than Nick), this business strategy brings with it a number of other market forces that cannot be ignored. Most notably, maximizing profits may significantly increase the volatility of the revenue stream. In addition, deliberately shrinking the market, particularly in developers tools, reduce the total market of the tool – and ultimately reduces demand.
Increased Revenue Volatility
Just for the sake of argument, let’s say my company has 100 customers. Let’s say it then turns out that my support costs are sky-high, so I decide to focus on maximizing profit by increasing the price of my product. In this way, I know fewer people will buy my product but I also know that revenue per unit will be higher and support costs will be lower. Again, just to work with round numbers, let’s say this shrinks my customer base to 10 very profitable clients. The problem this presents is now my revenue stream is much more volatile. With my original base of 100 customers, losing 1 customer means the loss of only 1% of my business. However, with the smaller customer base of 10 the cost of losing each customer is much greater: 10% of my revenue. Of course, these numbers are totally contrived, but the concept behind them is solid: the fewer customers you have, the less you can afford to lose them.
A smaller market might be fine for some kinds of products. Fine wines or luxury cars, for example, are markets designed for the high margin/great service/few customers business model. However, a small market is not a good thing for developer tools. In developer tools, market share is king. While a small portion of the developer tools market will stick to their favorite tool, popularity be damned, the vast majority of the tools market will tend to follow the trends, those tools and technologies that organizations feel have the best longevity and developers feel will keep them best employed. At the end of the day, this translates into continually decreasing demand for the smaller market tools – a sort of death spiral into sub-one-percent-market-share oblivion.
In short, I’m not as fond as my good friend, Nick, of the Borland Delphi pricing strategy. I enjoy Borland tools, but it’s clear that the growth of products like MS Visual Studio.NET and Eclipse is occurring at the expense of the higher-priced Borland offerings. I would prefer to see a strategy that more effectively balances growth with profitability.