Another reason software wins

You know, there are two ways to try to build a business:

You can pull a Steve Jobs, and offer customers something they didn’t know they wanted.

That’s how we got the iPhone.

It’s also how we got the Laser Disc, so there’s that.

If you can tap into something deep — or create that ‘something’ with a great product and great marketing, you’re set.

Afterpay Ltd (ASX: APT) might be perhaps the best recent Australian example.

It’s a high-wire act, but it’s possible for a special few.

The other way?

You can ask customers what they want, then build it.

Bonus points if the customer will pay you to build it, and you can sell that same thing to even more customers.

Unlikely?

For the most part, yes.

Woolworths Group Ltd (ASX: WOW) can’t ask each customer what they want, then stock just those things.

And even if they did, it’s not a great way to run a high volume, wide-range business.

Ah, but if you’re a software company?

Well, that’s different.

Not only can you design something by working with current or prospective customers, but they’ll likely pay you for doing the work.

No, not ‘Build it and they will come’, but rather ‘They’ll come, and then you can build it’.

Sounds good huh?

And, as I intimated above, the great thing about software is that it’s completely replicable.

Write the code for one customer, and you can sell the resulting software to tens, hundreds, and thousands of others.

It’s so good that it’s almost unfair.

No business is quite that straightforward, of course, but it beats many of the alternatives.

You don’t have to put cars on the lot.

You don’t have to build the apartment building and hope the buyers come.

You don’t have to tool up the factory, hoping they’ll want your widgets.

Being able to build something, to meet a customer’s needs, who then commits to take the end result… well, that’s a pretty good start.

Then sell a copy. And another one. And another.

Good huh?

(A quick aside: it’s one of the benefits of studying company business models. Knowing how and when the cash flows, plus the assets and liabilities involved in running a business can be a big advantage. It doesn’t always lead to outsized investment returns, but can help swing the odds in your favour).

Investing doesn’t need to be super-complex.

But knowing a little about how a company makes its money, as well as the advantages and disadvantages of its business model, can really make a big difference.

Fool on!

The post Another reason software wins appeared first on The Motley Fool Australia.

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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended AFTERPAY T FPO. The Motley Fool Australia owns shares of and has recommended AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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