Network Effects And Scale Economies (aka Spolsky vs. Heinemeier) - Continuations

Joel Liu's personal annotations on this page

Joel bookmarked on 2009-11-05

And he is right to point out that scale economies can make a huge difference in software. Because the cost of making software (whether installed or SaaS) is mostly fixed, any incremental sale provides 80%+ of gross margin. That means that once you have covered your fixed cost you have a lot of “play money” to start throwing around. You can, like Spolsky’s Oracle example, spend heavily on marketing (and unless you believe that marketing is 100% useless) that will make a difference to sales. And of course here is where things start to get interesting, because you can have such a strong feedback loop that it allows the first player that gets to scale to become 10x bigger than the next player (grow faster, make more money, spend more on marketing, grow even faster).
So I believe the assertion that bug tracking is definitely not a network effect business is wrong. The effects may be weaker, but anybody offering software today and not thinking about how to create and sustain network effects in what they are doing is missing a big opportunity.

This link has been bookmarked by 1 people . It was first bookmarked on 05 Nov 2009, by Joel Liu.

05 Nov 09

Joel Liu
- And he is right to point out that scale economies can make a huge difference in software. Because the cost of making software (whether installed or SaaS) is mostly fixed, any incremental sale provides 80%+ of gross margin. That means that once you have covered your fixed cost you have a lot of “play money” to start throwing around. You can, like Spolsky’s Oracle example, spend heavily on marketing (and unless you believe that marketing is 100% useless) that will make a difference to sales. And of course here is where things start to get interesting, because you can have such a strong feedback loop that it allows the first player that gets to scale to become 10x bigger than the next player (grow faster, make more money, spend more on marketing, grow even faster).
- So I believe the assertion that bug tracking is definitely not a network effect business is wrong. The effects may be weaker, but anybody offering software today and not thinking about how to create and sustain network effects in what they are doing is missing a big opportunity.