From: alexhormozi
Software can be a significant vehicle for packaging services, knowledge, and labor into a profitable business, especially for those looking for high enterprise value on exit [00:04:06]. While not suitable for all service types, such as hair cutting, it is applicable where software can automate or enhance the service provision [00:04:14].
Software as a Business Model
This model involves creating a “software tech-enabled service” [00:04:22]. For most service-based businesses, this might be a less common path compared to private chains, franchises, or licensing models [00:04:30].
Key Considerations and Challenges
- High Development Cost & Time: Building software requires a significant upfront investment in terms of both money and time [00:11:50].
- Low Initial Cash Flow: Unlike licensing, which can generate cash flow from day one, software typically experiences very low cash flow during its development phase [00:11:53].
- Expertise Requirement: Success in software development necessitates strong internal capabilities. It is strongly advised against outsourcing development to third-party teams, as this often leads to failure, potentially costing millions of dollars [00:04:34]. Ideally, a business should have a software co-founder skilled in coding, user experience (UX), and building engineering teams [00:04:35].
Enterprise Value and Retention
The primary advantage of a software model is its potential for extremely high enterprise value upon exit [00:11:55]. However, to achieve a high valuation, a critical factor is customer retention:
- High Yearly Retention: To be considered a valuable software company by investors, a business needs to achieve 80% or higher yearly customer retention [00:12:06].
- Impact of Low Retention: If retention rates fall below 80%, the business may not be valued as a software company but rather as a normal service business with merely a “tech element,” diminishing its perceived value despite the investment [00:12:12].
In summary, choosing software as a delivery model for scaling a service-based business is a strategic decision that trades immediate cash flow and ease of setup for long-term enterprise value, provided stringent retention and development requirements are met [00:13:41]. When evaluating business frameworks for growth, considering the upfront investment, time commitment, and risk appetite is crucial [00:12:46].