RECOMMENDED: Find the perfect business for you with our Business Ideas Tool.
Software is ubiquitous in today’s world, and many people and organizations can no longer function without the programs they rely on. These programs, of course, must be created, distributed and maintained. That’s the work of software development companies.
The software development industry is both big and strong. According to IBISWorld, the software publishing industry has an annual revenue of $238 billion and a growth rate of 3.9 percent per year. In total, the industry employs more than a half-million people.
Who is this business right for?
While many different types of people work within the software development industry, business founders tend to be people who bridge the gap between logic and creativity. Writing programs, of course, requires a strong command of logic. Having the vision for a software program that’ll be useful, however, requires creativity.
What happens during a typical day at a software development business?
Much of the work that goes on at a software development company is done on a computer. Business owners spend time writing code, testing and debugging programs, marketing their programs and providing support to customers.
What is the target market?
The target market for a software development company can be almost anyone, but it must be well-defined. Business owners need a clear understanding of a need that people or businesses have, and how a program addresses that specific need.
How does a software development business make money?
Software development companies have traditionally charged customers on a per-license basis, but many companies are transitioning to a software-as-a-service (SaaS) structure instead. In SaaS arrangements, customers pay an ongoing fee in order to use the developing company’s program. Some level of support is usually included in this fee.
A few outlying software development companies don’t charge license or subscription fees. Instead, these companies typically either build advertisements into their programs or offer training that does have a fee associated with it.
What is the growth potential for a software development business?
A software development company can be a small, one-person business, or it can grow into an international corporation. Gorges is a local development company in Ithaca, NY, and Logos is a good example of a niche-specific company. Microsoft and Apple are two of the largest software developers in the world, although their work isn’t limited to only making programs.
What are some skills and experiences that will help you build a successful software development business?
Business owners must themselves know how to code in at least one programming language, and competency in several languages is highly advisable. This technical knowledge is necessary to code and debug programs. Business owners also need it so they can discuss issues with other programmers or developers working on the company’s projects.
People who don’t have sufficient coding knowledge can study different languages through both in-person and online courses. Many community colleges and four-year colleges have computer science programs, and local software developers may offer private tutoring. Regent University, Saint Leo University, Southern New Hampshire University and many other schools offer online degree programs in Computer Science.
What are the costs involved in opening a software development business?
The costs associated with opening a software development company can range from very little (i.e. less than $1,000) to extremely high sums (i.e. venture capital funds). The money invested in a business typically goes toward:
- website hosting expenses and data storage fees
- specialized programs that a project requires
- copyright, trademark and patent fees
- additional employees or contract workers
The variance in startup costs is primarily due to the number of employees and contract workers brought onto the project. Workers speed up the development timeline, but also increase costs.
Paul Jarvis’ company OfCourseBooks is a good example of how a successful business can be started for very little. Jarvis and his team spent $1,125 in startup costs. The funds paid for a website, specialized fonts, stock photography, legal fees, the first month’s operating expenses and a couple other miscellaneous items.
John Sung Kim took a different approach with his company, getting a $40,000 initial investment before developing a call center software program.
What are the steps to start a software development business?
Once you're ready to start your software development business, follow these steps to ensure that your business is legally compliant and avoid wasting time and money as your business grows:
- Plan your business. A clear plan is essential for success as an entrepreneur. A few important topics to consider are your initial costs, your target market, and how long it will take you to break even.
- Form a legal entity. Establishing a legal business entity prevents you from being personally liable if your software development business is sued.
- Register for taxes. You will need to register for a variety of state and federal taxes before you can open for business.
- Open a business bank account. A dedicated checking account for your software development business keeps your finances organized and makes your business appear more professional to your customers.
- Set up business accounting. Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.
- Obtain necessary permits and licenses. Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.
- Get business insurance. Insurance is highly recommended for all business owners. If you hire employees, workers compensation insurance may be a legal requirement in your state.
- Define your brand. Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
- Establish a web presence. A business website allows customers to learn more about your company and the products or services you offer. You can also use social media to attract new clients or customers. Save 15% when you create a business website with Weebly.
Select your state below for an in-depth guide on completing each of these steps in your home state.
Where can I find a business mentor?
One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.
Having a support network in place to turn to during tough times is a major factor of success for new business owners.
What are some insider tips for jump starting a software development business?
Many successful software development companies have raised support on Kickstarter before launching. Jarvis used this strategy to raise over $12,000 before launching OfCourseBooks. Pillars of Eternity, a computer-based role-playing game (RPG) raised almost $4 million on Kickstarter.
How to promote & market a software development business
Most software development companies market their programs online, through websites and other platforms. What other platforms are most appropriate for a particular business to use depends on what programs that business creates. A business that makes spell checkers for legal documents won’t want to market in the same place as a video game.
Recommended: Get started with local advertising for your business with a $300 credit from Yelp.
How to keep customers coming back
A software company’s programs must work well, or else customers will switch to more user-friendly and error-free programs. For this reason, the testing and debugging phase of development shouldn’t be rushed.
How and when to build a team
Whether a software development company hires people depends on the business’ owners expertise, program’s complexity, business’ budget and required timeline.
Business owners who do hire employees frequently bring on computer programmers, computer developers, designers and marketers. All of these people can be hired as traditional employees or on a contract basis. Sometimes, salespeople are brought on board . They may be given a salary, a commission or both.
State & Local Business Licensing Requirements
Certain state permits and licenses may be needed to operate a software development business. Learn more about licensing requirements in your state by visiting SBA’s reference to state licenses and permits.
Most businesses are required to collect sales tax on the goods or services they provide. To learn more about how sales tax will affect your business, read our article, Sales Tax for Small Businesses.
For information about local licenses and permits:
- Check with your town, city or county clerk’s office
- Get assistance from one of the local associations listed in US Small Business Associations directory of local business resources.
Maintain Personal Asset Protection
Don’t think that just forming an LLC, or any other type of business, will save your personal assets in case of a lawsuit or other matter by itself.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your LLC is sued. In business law, this is referred to as piercing your corporate veil.
Two of the simplest steps that will protect your business, and yourself, are to:
Open a business bank account
- This separates your personal assets from your company's assets, which is necessary for personal asset protection.
- It also makes accounting and tax filing easier.
Get a business credit card
- This helps you separate personal and business expenses by putting your business' expenses all in one place.
- It also builds your company's credit history, which can be useful to raise money and investment later on.
Certificate of Occupancy
A software development business is generally run out of an office. Businesses operating out of a physical location typically require a Certificate of Occupancy (CO). A CO confirms that all building codes, zoning laws and government regulations have been met.
- If you plan to lease a location:
- It is generally the landlord’s responsibility to obtain a CO.
- Before leasing, confirm that your landlord has or can obtain a valid CO that is applicable to a software development business.
- After a major renovation, a new CO often needs to be issued. If your place of business will be renovated before opening, it is recommended to include language in your lease agreement stating that lease payments will not commence until a valid CO is issued.
- If you plan to purchase or build a location:
- You will be responsible for obtaining a valid CO from a local government authority.
- Review all building codes and zoning requirements for your business’ location to ensure your software development business will be in compliance and able to obtain a CO.
How much can you charge customers?
There is a great range in how much computer programs cost. Simple apps are frequently free or just a few dollars. Complex enterprise solutions can cost tens of thousands of dollars. For example, Angry Birds originally cost $0.99 to $2.99 and is now free. Microsoft Dynamics 365 can be $190 per user / per month.
What are the ongoing expenses for a software development business?
The ongoing expenses for a software development company also vary. OfCourseBooks costs $45 per month to maintain. A program like Microsoft Dynamics 365 require many more servers and a lot more personnel to maintain, and therefore, has much higher operating expenses.
How much profit can a software development business make?
While not every business reaches this level, the profit potential for a software development business can be enormous. John Sung Kim stayed with Five9 until its revenue reached $10 million. An IPO on the NASDAQ valued the company at $350 million.
Even much more modest companies have substantial profits. For instance, OfCourseBooks brought in a little over $11,000 in profit before even launching a program.
How can you make your business more profitable?
Software development companies can increase their profits by providing additional services to clients. Expedited support, extra training and program customizations might be offered at an extra cost.